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Easing of liquidity reflected in the reduced mop-up through bulk deposits this week. In the first week of this calendar year, resources raised through bulk deposits were just Rs 3500 crore. Last week, banks had raised Rs 15,000 crore.
The softening of the cash needs in the markets also showed up in the overnight bank borrowings from the Reserve bank of India (RBI). At Friday's Liquidity adjustment facility auctions, borrowings were down to Rs 92,370 crore or about 1.6 per cent of the aggregate deposits.
Traders said that the easing of liquidity was contributed by the return of cash paid out by corporates in the form of advance taxes back into the banking system. In the first half of December, the government had raised close to over Rs 70,000 crore through advance taxes.
The advance tax payments had coincided with the RBI's interventions in the foreign exchange market. The combined effect squeezed cash in the banking system, escalating overnight bank borrowing from the Liquidity Adjust Facility window.
There were no interventions in the foreign exchange markets by RBI during the week, the traders added. Intervention through sale of dollars into the banking system tends to remove rupee liquidity from the banking system.
Last few week interventions however pulled down country's foreign currency reserves below the $300 billion mark for the first time since January 2011. External reserves are at the lowest level since December 2010. The drawdown was partly on account of the massive interventions in the foreign exchange markets.
In December alone the RBI has sold about $8.76 billion to stem the rupee's fall. Since April this year, the rupee has plunged nearly 18 per cent against the dollar.
The rupee story still appeared in complete. Fears are that the plunge was likely to resume again.
Rating agency economist, associate economist, Fred Gibson, said: "Slowing demand from Europe – a key market – has been the main driver. This trend is expected to continue in the near term as European demand remains very weak. India will continue to run sizable trade deficits which alongside a fiscal shortfall and a deteriorating economic outlook will continue to put downward pressure on the rupee in 2012." This means that the ability of the RBI to carry out further currency market interventions is weakened.
With the external situation still uncertain, the focus was inwards to revive slowing growth. Bankers said that credit pick up had still not occurred. In fact most of the off take was entirely for working capital needs of the energy sector. Credit off take is a leading indicator of GDP growth. For the latest period credit off take was Rs 85,000 crore lower than the corresponding period of last year.
As a result, some were expecting efforts to push up credit offtake in the peak season. Canara Bank's chief economist Manoranjan Sharma said, "If growth is to be fixed some monetary easing measures would be needed now that inflation at least appears to be contained." Moreover statements from the RBI governor Subir Gokarn in Singapore also gave rise to such hope.
Yet whether they will translate into lending rates is a different question. Government borrowings this quarter is estimated at Rs 2.68 crore both through short term and long term borrowings. All other borrowers will stay crowded out, therefore. Inflation uncertainties also continue.
This is especially in an environment where global energy prices still remain firm and likely to go up further in view of mounting tensions between Iran and the U S. India imports about 400000 barrels per day from Iran.
Sharma said: "Given this global environment, the risk of an inflationary resurgence is always there. But there could be a trade off." The trade off was between growth and inflation. Market inferences drawn from the RBI cues is that the former will receive precedence.
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