Corporate advance tax outflow may worsen liquidity scenario

Liquidity could worsen despite the Reserve Bank of India (RBI) announcing open market operations (OMOs) by purchase of gilts worth Rs 12,000 crore (Rs 120 billion) on December 4.

Liquidity will be under pressure as the deadline for the third instalment of corporate advance tax falls on December 15. According to market estimates, the liquidity strain due to advance tax payment will be in the range of Rs 50,000-60,000 crore (Rs 500 - 600 billion).

The street was expecting OMOs for quite some time and, in response, the RBI on Thursday announced for four gilts - 8.24 per cent 2018, 8.19 per cent 2020, 8.15 per cent 2022 and 8.28 per cent 2027.

On Thursday, banks borrowed Rs 1,018.80 crore (Rs 10.18 billion) under RBI's daily liquidity adjustment facility (LAF), compared with a borrowing worth Rs 1,064.55 crore (Rs 10.65 billion) on Tuesday.

Wednesday was a bank holiday due to Guru Nanak Jayanti. The borrowing by banks under the RBI's daily LAF stood at an average of Rs 92,820 crore (Rs 928.20) in the past month.

"Liquidity is expected to stay tight till the end of December. The peak-level LAF drawdown may overshoot Rs 150,000 crore (Rs 1.5 trillion), post advance tax outflows in the third week of December," said Moses Harding, head of economic and market research at IndusInd Bank.

Anoop Verma, associate vice-president at Development Credit Bank, agreed that LAF borrowings are set to rise from current levels.

"The borrowing under daily LAF may climb up by another Rs 20,000-30,000 crore (Rs 200-300 billion) as we approach December 15,"

said Verma. According to him, this will be because government spending is not improving.

But the street feels there is a need for more OMOs in a situation where liquidity is about to get strained and the RBI is auctioning gilts every week to meet government borrowing. In the current financial year, the RBI has already infused Rs 54,573.277 crore (Rs 545.73 billion) worth of liquidity by way of OMOs.

But, the OMO announcement is expected to help gilts yields fall from the current levels. "The yield on the 10-year benchmark gilt 8.15 per cent 2022 may drop to 8.15 per cent on Friday," said S Srinivasaraghavan, executive vice-president and head of treasury, Dhanlaxmi Bank.

On Thursday, the 10-year benchmark gilt yield ended at 8.21 per cent, compared with Tuesday's close of 8.19 per cent.

The yield on the 10-year benchmark gilt 8.15 per cent 2022 rose to a 12-week high of 8.23 per cent last week on speculations that the government would resort to additional borrowing to the tune of Rs 30,000-40,000 crore.

To ease the liquidity situation, the RBI had cut the cash reserve ratio (CRR) in the second-quarter monetary policy review on October 30, by 25 basis points to 4.25 per cent. CRR is the proportion of total deposits a bank has to keep with RBI as cash.

However, despite the CRR cut, borrowing by banks has been above the RBI's comfort level of +/- 1 per cent of NDTL (net demand and time liabilities). If the average daily borrowing under the RBI's LAF is below Rs 65,000 crore (Rs 650 billion), then it is considered comfortable.