Cash to get scarce in coming days

19 Jul, 2008, 0107 hrs IST, ET Bureau
MUMBAI: Cash in the money market is likely to get even more scarce in the coming days. Banks will now have to place an additional part of deposits with the RBI starting July 19, when the revised norms on cash reserve requirements come into force. This is at a time, when banks have been borrowing close to Rs 30,000 crore from the Reserve Bank of India (RBI) on a daily basis. The RBI hiked the cash reserve ratio (proportion of deposits which banks have to park with RBI as cash) to 8.75% in June, besides making it costlier for banks to borrow from its daily cash window. As a result, funds worth almost Rs 16,000 crore would be seen moving out of the banking system. Starting next week, banks have to park Rs 8.75 for every Rs 100 worth of deposit they gather. That apart, banks have to pay 8.5% to the central bank as interest on their daily borrowings from RBI’s cash window, thus making it costlier for them to manage their cash flows. While the CRR hike itself will take out Rs 8,000 crore from the system next week, RBI would also be issuing bonds worth Rs 10,000 crore, bring cash conditions under further pressure. Treasury managers foresee banks to be borrowing up to Rs 45,000 crore from the central bank at the daily repo window next week while borrowing rates in the inter-bank call money market are expected to rise to 9.5%. IDBI Gilts head of treasury SS Raghavan said, "While all signals seem to be hinting at another 50-bps hike in the cash reserve requirements in the forthcoming policy review, there will be some respite, with Rs 30,000 crore of the loan waiver amount reaching banks, following the policy." A good stock of treasury bills issued in April is maturing in July. It was anticipated that fund proceeds of these bills would ease the cash crunch in the banking system. A senior trader with a leading bond house pointed out had most treasury officials were hoping that these funds would provide some respite to the liquidity crisis. However, the central bank simultaneously announced a series of bonds sold through the market stabilisation route to essentially suck out these funds. The banking system has been experiencing tight cash conditions since the past one month. On one hand, inflows in the foreign exchange market have been dwindling off, at a time when there were fund outflows owing to corporate tax payments in mid-June.