Tuesday, July 23, 2013

RBI squeezes liquidity furtherOvernight rates may hit double digit; Bond yields to spike

Mumbai: July 23, 2013(7STARNEWS)The Reserve Bank of India has further tighten the liquidity in the banking system by curtailing bank's borrowing from the liquidity adjustment facility by half – from 1% of lender's net demand and time liabilities. In addition, banks now have to maintain 99% of cash reserve ratio requirement on a daily basis, increased from 70% mandated earlier.

However, RBI's has not cut down the aggregate borrowing of Rs 75,000 crore from LAF, as mandated a week ago in the first round of liquidity tightening measures. In effect though, bank borrowing from the LAF facility will be reduced by half. In case, banks want more funds, it will have to borrow from the marginal standing facility which charges an interest rate of 10.25%.

"Effective from the first day of the next reporting fortnight (July 27) banks will be required to maintain a minimum daily CRR balance of 99% of the requirement," RBI said.

The measures were aimed to increase the short term rate to curb speculation in the foreign exchange market. Market participants expect today's measure will increase yields on government bonds. Increase in short term rates will result in higher cost of borrowing for banks and will impact margins. Increase in government bond yields, on the other hand, will impact treasury earnings.

\"The treasury portfolio of banks will start bleeding now. Tomorrow the yield on the 10-year benchmark government bond may rise by 10-15 basis points and similarly short-term rates across various tenures are also set to rise by 10-20 basis points. Now even if we decide to borrow from the Marginal Standing Facility (MSF) the rate is 10.25% while my base rate is 10% due to which we will be making a loss in our lending business,\" said the treasury head of a public sector bank. The yield on the 10-year government bond 7.16% 2023 ended at 8.18% compared with previous close of 8.09%.

The overnight rates are expected is expected to go beyond 10% tomorrow. Call money rates ended at 7.17% compared with previous close of 7.23%.

Last Monday, Reserve Bank of India (RBI) had capped the bank borrowing from the liquidity adjustment facility at Rs 75,000 crore and increased the marginal standing facility rate by 200 bps to 10.75%. The central bank has also conducted open market sale of government bonds to suck out liquidity from the system.

"These measures have had a restraining effect on volatility with a concomitant stabilising effect on the exchange rate," RBI said in a press statement today.

Following RBI's earlier liquidity squeezing efforts, yields on the 10 year government bonds spiked 50 bps to cross the 8% mark. Certificate deposits rates had also jumped around 150 bps to over 9% immediately after the central bank's measures.

While the liquidity in the banking system tightening immediately after the earlier steps, but had eased subsequently. Banks borrowing from the central bank had falling around Rs 50,000 crore mark from a high of Rs 2 lakh crore. Call rates have now hovering around 7% down from 9% of last week.
News From: http://www.7StarNews.com

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