The liquidity conundrum

The key question is how much liquidity does the Reserve Bank want in the system. Appropriate, adequate, or abundant?

- TAMAL BANDYOPADHYAY

Water, water, everywhere, Nor any drop to drink.

These two lines from Samuel Taylor Coleridge's poem, The Rime of the Ancient Mariner, summed up sailors' plight: They are dying of thirst despite being in the middle of the ocean since all around them is the undrinkable saltwater.

These days, if you sneak into the cabins of senior bankers managing liabilities, you'd find them facing a similar situation, with one difference - in place of water is money. The system is slush with money but the pile of low-cost savings and current accounts is depleting every quarter.

There is no cheap money to lend at a decent margin.

So don't be surprised if you hear them murmuring: Money, money, everywhere But the cost is high Cheaper fund is history now Margin dropping, sigh...

In the last week of June, some of the large public-sector banks disbursed a few thousand crore rupees in loans to a few public-sector undertakings. The one-year loans carried interest rate tags between 5.75 per cent and 5.97 per cent. The banks were under pressure to push credit growth as the end of the June quarter approached.

But how would they make money if they give loans at such low rates? Liquidity in the system had a deficit of 2.4 trillion towards the end of the last financial year (on March 23); it is now in surplus of around 3 trillion.

On July 4, the surplus crossed 4 trillion. This shift is due to aggressive open market operations, or OMOS, by the Reserve Bank of India (RBI).

The RBI had bought ₹4.95 trillion worth of bonds through OMOS, releasing money into the system. In addition to that, there was a buyback of ₹1.5 trillion worth of bonds by the government, adding to core liquidity in the system.

With too much money in the system, overnight rates started dipping below the standing deposit facility, or SDF, the floor of the RBI's liquidity adjustment facility (LAF) framework.