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Short-term Borrowing Rates on the Rise

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Tight liquidity situation in the system pushes rates higher raising concerns over impact on growth
Short-term borrowing rates have risen despite the Reserve Bank of ndia's sharper-than-expected rate cut in September, thanks to the tight liquidity conditions, raising concerns that this could act as a speed breaker for growth.
Short-term rates are about 35-45 basis points higher than the benchmark repo rate of 6.75%. These include the inter-bank call money market, collateralised borrow ng and lending and treasury bills. The dif erential was 15-25 bps just a few weeks ago.A basis point is 0.01 percentage point. “The efficacy of monetary policy transmission is facing a challenge due to sustained tight banking system liquidity ,“ said Soumyajit Niyogi, senior interest rate strategist at SBI DFHI Primary Deal ers. “Continuous elevated short-term rates are driv ing corporate borrowing costs higher and providing downward rigidity to bank ing rate specific instru ments...That would negate the very purpose of spur ring growth via rate cuts.“
Banks have been borrow ing more from the RBI's re po window than lending to the central bank. In the past seven days, the system has been in deficit by more . 1 lakh crore.than ` During Diwali, higher cash circulation in the system led to tight liquidity conditions, which was further aggravated by higher spending during the recent Bihar elections, experts said.
Total cash and currency in the system rose by Rs.25,777 crore in the week to No vember 6, the highest ever weekly increase, according to the latest RBI data. It will take some time for this to get funneled back into the banking system.
“The liquidity deficit is attributable to higher government cash balance with RBI and rise in currency in circulation,“ said Suyash Choudhary, head of fixed income, IDFC Mutual Funds. “Going forward, liquidity management is a key factor for short-term rates.“
The next monetary policy announcement is scheduled on December 1.
The gap, or spread, between 91-day treasury bills and the repo was about 2 basis points on August 12, that's widened to 40 bps now, which is also close to the average over the past year.
“With no rate hike in sight, what is triggering a 40 bps spread is something to be debated,“ said a treasury official at large private institution.
The Economic Times, New Delhi, 18th Nov. 2015

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