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Economy
Liquidity
Liquidity turnaround – unlikely to sustain. In the new fiscal year, liquidity swung
sharply into positive territory with LAF on April 5, 2011 at `325 bn after being at (-
)`1,060 bn on March 31, 2011. This was surprising but was mainly on account of
transitory product adjustments factors and also heavy government expenditure. LAF has
been in the negative mode consistently since June 2010 and the current surplus liquidity
conditions are also unlikely to sustain too much into future. We expect LAF to dip once
more into the negative zone in the next fortnight starting April 9 as the undermaintenance
of CRR is reversed.
Liquidity conditions worsen on year-end funding pressures
Banking system liquidity tightened significantly last week, with LAF infusion by the RBI averaging
`923 bn, higher than `689 bn in the previous week. On the last day of the fiscal, liquidity injection
by the RBI through the LAF operations peaked at `1,060 bn. This deterioration in the systemic
liquidity was a result of year-end funding pressures as banks sharply increased their cash balances
with the RBI, even as aggressive spending by the government during the week (around `300-400
bn) helped to contain the liquidity deficit. During a fortnight, banks are required to maintain on an
average 100% of the required CRR as cash balances with the RBI, with a minimum daily
maintenance of 70%. As of March 31, banks cash balances with the RBI amounted to `4,030.71
bn, which is 123% of the required CRR for the fortnight March 26-April 8. In the absence of this
excess CRR maintenance of `762.44 bn, liquidity deficit would have been more modest to the
tune of `297.61 bn on March 31.
Liquidity in surplus mode this week on product adjustment
From `1,060.05 bn liquidity deficit last week, banking system liquidity swung sharply into the
positive territory on the first bank working day of FY2012. Government spending alone could not
have accounted for such a large swing in the liquidity position. In our view, the sharp swing in
liquidity was due to banks possibly under-maintaining on the CRR requirement. Banks’ cash
balances with the RBI are likely to have dropped to around 85% of the required CRR on April 5,
2011 from 123% on March 31. This reduction in daily cash balances of banks would in itself
release almost `1,300 bn into the system. This has contributed to systemic liquidity suddenly
turning positive at `325 bn on April 5 and increasing further to `696 bn on Wednesday. In the
remaining part of this fortnight, we expect banks to maintain around 85% of the required CRR as
cash balances with the RBI, so as to bring down the average CRR maintenance for the fortnight as
close to 100% from 114% as of April 3, 2011. Further, impact of government spending towards
the end of the year would also get reflected in the LAF numbers this week. We expect liquidity to
remain in the surplus mode for the remaining of this fortnight ending April 8.
Liquidity to return and sustain in a deficit mode beginning next fortnight
As the current surplus is a product adjustment phenomenon, we do not expect the liquidity
surplus to persist. From April 9 a new fortnight begins and banks will have to increase their cash
balances closer to the required CRR for the forthcoming fortnight (likely at around `3,300 bn from
`3,268 bn this fortnight). This would result in a swing of `500-600 bn at the beginning of the
new fortnight itself, and could see LAF balances dip once again towards (-)`200 bn. Further,
Monday would also see an outflow of `120 bn for payment of Friday’s G-sec auction. In this
quarter, given the inflows and outflows from the system, and our expectations of government
expenditures at the start of the new financial year (based on historical trends) and high growth in
currency in circulation (due to seasonal factors as also upcoming state elections), we expect
banking system liquidity to remain in the deficit mode, closer to 1% of NDTL zone.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Liquidity
Liquidity turnaround – unlikely to sustain. In the new fiscal year, liquidity swung
sharply into positive territory with LAF on April 5, 2011 at `325 bn after being at (-
)`1,060 bn on March 31, 2011. This was surprising but was mainly on account of
transitory product adjustments factors and also heavy government expenditure. LAF has
been in the negative mode consistently since June 2010 and the current surplus liquidity
conditions are also unlikely to sustain too much into future. We expect LAF to dip once
more into the negative zone in the next fortnight starting April 9 as the undermaintenance
of CRR is reversed.
Liquidity conditions worsen on year-end funding pressures
Banking system liquidity tightened significantly last week, with LAF infusion by the RBI averaging
`923 bn, higher than `689 bn in the previous week. On the last day of the fiscal, liquidity injection
by the RBI through the LAF operations peaked at `1,060 bn. This deterioration in the systemic
liquidity was a result of year-end funding pressures as banks sharply increased their cash balances
with the RBI, even as aggressive spending by the government during the week (around `300-400
bn) helped to contain the liquidity deficit. During a fortnight, banks are required to maintain on an
average 100% of the required CRR as cash balances with the RBI, with a minimum daily
maintenance of 70%. As of March 31, banks cash balances with the RBI amounted to `4,030.71
bn, which is 123% of the required CRR for the fortnight March 26-April 8. In the absence of this
excess CRR maintenance of `762.44 bn, liquidity deficit would have been more modest to the
tune of `297.61 bn on March 31.
Liquidity in surplus mode this week on product adjustment
From `1,060.05 bn liquidity deficit last week, banking system liquidity swung sharply into the
positive territory on the first bank working day of FY2012. Government spending alone could not
have accounted for such a large swing in the liquidity position. In our view, the sharp swing in
liquidity was due to banks possibly under-maintaining on the CRR requirement. Banks’ cash
balances with the RBI are likely to have dropped to around 85% of the required CRR on April 5,
2011 from 123% on March 31. This reduction in daily cash balances of banks would in itself
release almost `1,300 bn into the system. This has contributed to systemic liquidity suddenly
turning positive at `325 bn on April 5 and increasing further to `696 bn on Wednesday. In the
remaining part of this fortnight, we expect banks to maintain around 85% of the required CRR as
cash balances with the RBI, so as to bring down the average CRR maintenance for the fortnight as
close to 100% from 114% as of April 3, 2011. Further, impact of government spending towards
the end of the year would also get reflected in the LAF numbers this week. We expect liquidity to
remain in the surplus mode for the remaining of this fortnight ending April 8.
Liquidity to return and sustain in a deficit mode beginning next fortnight
As the current surplus is a product adjustment phenomenon, we do not expect the liquidity
surplus to persist. From April 9 a new fortnight begins and banks will have to increase their cash
balances closer to the required CRR for the forthcoming fortnight (likely at around `3,300 bn from
`3,268 bn this fortnight). This would result in a swing of `500-600 bn at the beginning of the
new fortnight itself, and could see LAF balances dip once again towards (-)`200 bn. Further,
Monday would also see an outflow of `120 bn for payment of Friday’s G-sec auction. In this
quarter, given the inflows and outflows from the system, and our expectations of government
expenditures at the start of the new financial year (based on historical trends) and high growth in
currency in circulation (due to seasonal factors as also upcoming state elections), we expect
banking system liquidity to remain in the deficit mode, closer to 1% of NDTL zone.
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