RBI pumps in Rs 26,685 cr; eases liquidity / Dec 29, 2005 / Business Standard

From Indiapensions

RBI pumps in Rs 26,685 cr; eases liquidity

The Reserve Bank of India (RBI) for the third consecutive day today injected a large amount of liquidity into the banking system, ahead of the redemption of India Millennium Deposits (IMDs). RBI infused a whopping Rs 26,685 crore through the repo (repurchase) auction under its liquidity adjustment facility.

In the past three days, RBI pumped in around Rs 65,865 crore into the banking system, which has been starved of cash for the past few weeks. The overnight call rates have touched 7 per cent levels amid tight liquidity condition.

Dealers expect liquidity to worsen as the system will witnesses an outflow of Rs 33,000 crore on account of the redemption of State Bank of India's (SBI) IMDs tomorrow.

Traders are hopeful interest payments of Rs 10,000 crore expected by the end of December on a special deposit scheme run for investment by India's largest pension fund, the Employees' Provident Fund, would provide some respite from the liquidity squeeze.

"Even the government, which is sitting on a cash surplus of around Rs 20,000 crore, should start spending to boost domestic liquidity," said a chief dealer at a private bank.

Liquidity has dwindled by over 99 per cent since September. Net liquidity in the banking system is just Rs 135 crore, sharply lower than close to Rs 36,000 crore in mid-September.

MSS balances would fall by a further Rs 2,552 crore this week as more treasury bills mature. RBI has cancelled MSS auctions this week for the seventh week in a row. RBI has used the MSS instrument effectively to pump in funds into the banking system.

It also cancelled MSS auctions aggregating Rs 20,000 crore over the past seven weeks and yet the system continues to be gripped by a liquidity strain. With the market starved for cash, the RBI today fixed the cut-off yield for 91-day treasury bill at today's auction at 6.10 per cent.