The financial system, till recently flush with liquidity, has started witnessing a certain tightness. Reverse repo bids -- a barometer of liquidity -- are drying up.
At Thursday's repo auction, the Reserve Bank of India received only three bids for Rs 350 crore (Rs 3.5 billion). And after a gap of three months, there was a single repo bid of Rs 75 crore (Rs 750 million) to draw liquidity from the RBI.
Banks park their surplus rupee funds with the RBI under the reverse repo arrangement. In the case of repo, banks draw down funds from the RBI.
The reverse repo amount had hovered at Rs 50,000-60,000 crore (Rs 500-600 billion) in March-April, before the introduction of the market stabilisation scheme. Last month, it was in the Rs 13,000-15,000 crore (Rs 130-150 billion) range.
The overnight call rate, the rate at which banks borrow and lend for daily funds management, has gone up to almost 6 per cent from 4-4.5 per cent a week ago.
The situation is expected to worsen during the Rs 8,000 crore (Rs 80 billion) auction slated for Monday. The RBI is opting for a multiple price auction. This means the central bank may signal a higher interest rate regime through this auction.
In a tacit admission of the tight liquidity situation, the RBI today stopped further issue of market stabilisation bonds till November 10.
The present situation is the result of a series of developments. First, the 50 basis points hike in the cash reserve ratio to 5 per cent sucked out Rs 9,000 crore (Rs 90 billion) from the system. Also, a state government loan auction of the 7.36 per cent, 2014 paper to raise Rs 6,200 crore (Rs 62 billion), closed on Wednesday after managing to collect Rs 5,084 crore (Rs 50.84 billion).
The growth in foreign exchange inflows, which had been a big contributor to the easy liquidity situation, has been slowing down from over a $1 billion a week to $50-60 million now.
But the most important contributing factor to the tightness is the exceptionally high credit offtake, which has seen 28 per cent year-on-year growth in 2004, compared with 12 per cent last year.
Bankers expect the RBI to stop further issue of market stabilisation bonds to restore liquidity in the system.
The other alternative is to buy dollars from the foreign exchange market and release rupees into the system. Banks may also hike deposit rates to gather more resources. If the trend continues, interest rates are bound to firm up sooner than expected, according to senior bankers.