A record cash surplus at Indian banks is fading quickly as the central bank keeps liquidity tight to curb bets against the currency.
Analysts at IDFC First Bank and Emkay Global Financial Services expect the crunch to persist, saying the Reserve Bank of India appears reluctant to fully replenish banking system liquidity. The central bank has only offered limited relief. The resulting tightness has pushed overnight borrowing rates close to the top end of the central bank’s policy range. The cash crunch is also spreading through domestic funding markets. Higher bank funding costs can, in turn, potentially make it more expensive for non-bank lenders to raise money.
It has so far capped liquidity support at 1.5 trillion rupees, refraining from offering more funds on days when demand has exceeded the amount available. Rates on fresh three- and six-month certificates of deposit rose about 40-50 basis points last week to a seven-month high.
“There is a lot of uncertainty on where rates will go from here, but if the macro situation stays as is and crude oil prices inch higher, investors will want a premium on their investments,” said Ajay Manglunia, executive director at Capri Global Capital, a non-bank lender. “The borrowing cost curve can get steeper.”
The squeeze has intensified since the Reserve Bank of India earlier this month took sweeping measures to defend the rupee as it approached a record low.
