The Hindu Business Line : Banks go for reverse repo on surplus liquidity

The liquidity adjustment facility (LAF) auction on Wednesday saw banks taking recourse to the reverse repo window of the RBI to the extent of Rs 4,580 crore.

Similarly, on Thursday's LAF auctions too, the banks took recourse to the reverse repo window for Rs 10,170 crore.

Banking sources said that the surplus liquidity was mostly on account of the unwinding of market stabilisation scheme (MSS) securities.

The MSS securities were issued since the middle of 2004 and 2005 to mop up excess liquidity created by foreign exchange inflows into the country. They were mostly through issue of Treasury bills.

The outstanding MSS securities are estimated at Rs 36,981 crore. Sources said that some of these securities were in the process of maturing and relieving the tight liquidity situation in the markets.

The impact of the increased liquidity was felt on the Treasury bill auctions on Wednesday. Yields dropped to 6.60 per cent on the 91-day T-Bill, down from last week's 6.65 per cent. The 91-day T-bill yields had hit a high of 6.7 per cent early this month on the back of a tight liquidity situation.

Bankers said that part of the liquidity expansion was also due to State Governments drawing on their capital expenditure, after drawing on the Central Plan allocations. This withdrawal tends to bunch towards the end of the financial year.

In addition, bankers said, there were substantial inflows institutional investors domiciled in East Asia, particularly from Japan and Korea.

Both these countries have so far been parking their trade surpluses in US Government securities and non-Government securities, including corporate papers.

However, returns on US securities for 30-year papers are only about four per cent, less than the overnight federal funds rate of 4.5 per cent.

The bankers said that this indicated that investment returns in the US are unlikely to be attractive in the near term. As a result, some of the East Asian investors have shifted to markets such as India.

The net inflows from these sources during the week averaged $200-250 million a day, according to bankers. This was also leading to an expansion in domestic liquidity, they added.

This had pushed down call money to just 30 basis points above the reverse repo rate of 5.50 per cent. At the beginning of this week, call was above six per cent. Two weeks back, the rates were closer to the repo rate of 6.50 per cent.