RBI announces measures to boost liquidity

The Reserve Bank of India on Wednesday announced special measures to provide liquidity in the system, which  may face a cash crunch because of huge outgo on third generation telecom spectrum licences and payment of advance tax by companies.

In a late evening operation, RBI allowed banks to avail of additional support under the liquidity adjustment facility. Till July 2, banks have been permitted to avail of support of up to 0.5 per cent of their net demand and time liabilities, which will provide an additional liquidity support of over Rs 20,000 crore.

In addition, RBI said that as an ad hoc measure, banks can seek a waiver for any shortfall in maintenance of the prescribed 25 per cent statutory liquidity ratio while availing the temporary facility.

Besides, the central bank has decided to conduct two rounds of liquidity adjustment facility operations till July 2. Through LAFs, that are conducted at least once a day, banks can avail of funds through the repo window or park surplus cash through the reverse repo route. For several months, banks have been parking surplus cash, indicating that the system is flush with funds.

Minutes before RBI issued the statement, Deputy Governor K C Chakrabarty told reporters on the sidelines of an event that the central bank will ensure adequate liquidity.

Since the auction for 3G mobile telephony spectrum concluded on Friday, telecom operators, who have placed bids worth nearly Rs 68,000 crore, have been availing of credit lines from banks to make the payments by next Monday. As a result, banks, which had parked over Rs 47,500 crore through the reverse repo window on Friday, are now parking much lower amounts (see table). In addition, activity in the call money market has increased and rates have also hardened marginally.

Apart from bank loans, telecom companies have raised at least Rs 8,000 crore by issuing commercial paper.

Liquidity fears rose in the market on Wednesday after State Bank of India, a rare issuer of short-term paper, raised around Rs 1,000 crore via certificate of deposits.

"RBI has taken this step as the 3G fees will take away around Rs 40,000 crore from the system while the advance tax payment (due by June 2) will also suck out a substantial amount. Besides, there is the government borrowing programme which is underway. The moves will help the system," said Union Bank of India Chairman and Managing Director M V Nair.

Bankers, however, said that though liquidity had come down in recent days, there was still sufficient amount of cash available in the system to take care of the needs of borrowers. "Let's not forget that banks are still parking funds and none of them have used the repo window for several weeks. Also, there is around Rs 1,10,000 crore lying with mutual funds that can be tapped," said the executive director of a Mumbai-based public sector bank.

"There is enough liquidity in the market. It (borrowing by the telecom companies) should not create any problem. I think that has been factored in," SBI Chairman Om Prakash Bhatt said minutes before RBI's statement.

Bhatt said SBI has been approached by telecom companies for loans amounting to around Rs 18,000 crore rupees for payment towards 3G spectrum fees, but will provide only half of what has been approached.

SBI had earlier said that funding for 3G spectrum fee payment will halve the cash available with the bank. Excess liquidity with the country's largest lender has already come down from Rs 44,000 crore at the end of March to Rs 20,000 crore now.

The sharp decline in liquidity, which is on expected lines, has caused short-term rates to harden and SBI has also re-priced some of its short-term corporate loans, Bhatt said. "On the short-end, some re-pricing is taking place, it (rates) may be going up by 25 basis points," he said.