Tight liquidity in the money market has forced banks to offer higher rates on bulk deposits and raise as much as Rs 52,725 crore from the Reserve Bank of India. 

Banks on Monday offered as much as 7.05% for one-year bulk deposits that was being offered by NTPC and NMDC. About a month ago, banks were raising one-year certificate of deposits in the range of 6.25-6.50%. Most bankers feel that interest rates may go up marginally in the coming weeks since RBI has raised signalling rates and they do not expect liquidity to ease before the end of this month. 

Despite a nation-wide bandh on Monday, most banks had made arrangement for their treasury staff to come to office either early in the morning or Sunday late night itself to rebalance their treasury portfolio. This is because Monday was the first trading day after the Reserve Bank of India raised repo and reverse repo rate by 25 basis points on Friday. 

Given the tightness, RBI has extended until July 16 the special liquidity facility which expired on July 2. This facility allows banks to borrow from RBI by offering as collateral bonds that are part of the bank’s statutory liquidity ratio (SLR) requirement.

The trading volumes reported on the negotiated dealing system, or NDS, were in the region of Rs 9,500 crore on Monday against around Rs 6,800 crore on Friday. In fact, the 10-year benchmark paper — 7.80% maturing in 2020 — saw trading volumes of Rs 5,200 crore with around 644 trades against Rs 3,600-crore volume for the same paper on Friday with around 400 trades.

“Liquidity will start easing only on account of government spending and that I think will take about a fortnight or so. But even as liquidity improves, the system will not move to surplus mode. There will just be adequate liquidity in the system,” pointed out Golaka Nath, chief economist of Clearing Corporation of India, which provides banks a trading platform for government securities.

Bankers say the system will see a huge inflow of Rs 35,000 crore on July 28 as 11.30% 2010 security matures. “We think that liquidity will improve in the next 10 days and we shall be in surplus mode by the end of the month,” said CVR Rajendran, general manager in charge of treasury operations at Corporation Bank. “If liquidity eases, there is no justification for CD rate and CP rates to move up.”

The system is witnessing tight conditions for a month now largely because telecom companies paid a total of Rs 1.06 lakh crore to the government as payments to obtain spectrum for third general mobile telephony and broadband wireless access. Further, another Rs 30,000 crore moved out of the system by mid June as advance tax payment. Money, which now lies with RBI, will come into the system only in the form of government spending.

Bankers feel that tight liquidity conditions peaked last week when banks borrowed as much as Rs 80,000 crore from RBI under the repo auction, where it charges 5.50% for overnight money.