BWA outgo to keep liquidity tight

The liquidity easing measures taken by the Reserve Bank of India (RBI) have provided some comfort to the market. But despite that, concerns remain due to the payment of licence fees by broadband wireless access (BWA) auction winners.

On Wednesday the RBI announced repurchase of three gilts — the 12.25% 2010, the 11.30% 2010 and the 6.57% 2011.

The repurchase was announced for Rs 20,000 crore and in two tranches. The first tranche, worth Rs 10,000 crore took place on Friday. The second will occur on Monday. This helped prevent yields from rising sharply. The benchmark 10-year gilt — 7.80% 2020 — saw yield move up by only 3 basis points week on week to 7.59% levels, despite double-digit wholesale price index (WPI) inflation and high index for industrial production (IIP) numbers.
Liquidity.

The central bank decided to inject liquidity into the system as liquidity had shrunk after the payment of 3G spectrum fees worth Rs 67,000 crore by auction winners and the first installment of advance tax outflow.

The liquidity crisis is evident from the fact that call rates have moved up. The two-day call rate ended at 5.40% on Saturday, compared with 5.22% last Saturday.

In order to meet the liquidity crunch, banks resorted to borrowing heavily from the RBI under the repo window. Banks borrowed Rs 1,33,535 crore and parked Rs 1,600 crore under the liquidity adjustment facility in the week of June 14-18.

The liquidity crunch also impacted the auction of gilts worth Rs 11,000 crore on Friday. The auction of 8.20% 2022 worth Rs 5,000 crore passed
through. But there was a partial devolvement in the 6.85% 2012 auction for Rs 6,000 crore, on primary dealers worth Rs 1,386 crore.

Liquidity is expected to remain tight in the next fortnight as another Rs 30,000-35,000 crore will move out of the banking system towards payment of BWA auction fees, estimates market players. As a result, the market expects call rates to hover in the range of 5.25-5.50% this week.

Tightening talk
WPI inflation for May touched double digits at 10.16% and IIP numbers showed a sharp rise in April to 17.6%. This has triggered concerns in the market that RBI may resort to an intermediate rate hike before July 27 (monetray policy review day).

C Rangarajan, chairman of the economic advisory council to the prime minister, said Thursday: “Inflation has reached a very uncomfortable level. The double-digit inflation has remained for almost three to four months and it can no longer be triggered as purely food inflation because manufacturing sector is showing a reasonably high degree of inflation. Some action on the demand side is called for. It is for the RBI to decide whether to take action immediately or later. But I think the question of tightening of policy has become imperative.”

The RBI had said in January that it is moving from an accommodative policy to tightening policy measures. On Friday, RBI governor D Subbarao said the central bank will continue its calibrated, gradual policy exit and can’t comment on whether it would take “baby” or “big” steps on the rate hike front.

As a result, gilt dealers continue to remain bearish. They expect
the benchmark 7.80% 2020 to trade in the range of 7.50-7.65% this week. The RBI will auction gilts worth Rs 15,000 crore this week. Amid liquidity crunch and concerns of an intermediate rate hike, traders don’t rule out the possibility of a partial devolvement.