Description
Describes what is liquidity, what are the indicators of liquidity, what the factors affecting liquidity, it also examines the reasons of liquidity crunch in May June 2010, what are measures taken by RBI to ease the liquidity crunch.
Liquidity Crunch in May-June 2010
MBF M
Click to edit Master subtitle style
1/30/13
Issue
Within a short span of a fortnight around end-May 2010 early-June, the liquidity situation drastically reversed from abundance to shortage
1/30/13
Flow of presentation
Ø Ø Ø
Liquidity Liquidity Indicators Reasons for liquidity crunch (in May ’10) Repercussions Measures taken Further Measures
Ø Ø Ø
1/30/13
Liquidity
•
The amount of money floating in the system that is available to all participants in the financial markets, which includes individuals, corporate entities and the government
1/30/13
Factors affecting Liquidity
•
Influenced by demand and Supply of money in the system There are three ways in which liquidity gets affected
–
•
Borrowings of the government Increased borrowings by the corporate sector
–
Reduction of availability of the rupee by the central bank by buying rupee and 1/30/13 selling a foreign currency such as the
–
Liquidity Indicators
•
Repo rate: The rate at which the RBI lends money to commercial banks Reverse repo rate: The rate at which Reserve Bank of India (RBI) borrows money from banks. Call rate: Interest rate that banks charge to brokers to finance margin loans to investors.
1/30/13
•
•
Liquidity Crunch : Data
•
Repo and reverse repo outstanding amounts available with the RBI also indicate the liquidity situation Excel sheet
Source : RBI website
•
Govt. deposits in RBI Balance Sheet
1/30/13
Call Rate % (May-June 2010)
6
5.5
5
4.5
4
3.5
3
2.5
2
1/30/13
Source: RBI website
Reasons For Liquidity Crunch
1/30/13
The 3G auction effect
•
9 bidders competing for three to four spectrum slots in 22 zones across the country The telecom companies had to pay around Rs 67,719 crores to the government within 10 days after the auction ended Banks lent over Rs 60,000 crores
•
1/30/13 •
The 3G auction effect
•
To fund this loan demand, they withdrew their investments in liquid schemes of mutual funds, further adding to the liquidity woes. This led to a liquidity squeeze with the flow of funds from banks and the markets to the government’s coffers.
1/30/13
•
An Example
Highest bidder in 3G auction (Rs 12,295.46 crores) Bharti Airtel Call market
Borrow from other banks Borro w
Govern ment
Bank
Borrow from RBI, Increase in Repo
1/30/13
Acquisition of Zain communic ations. ($7.9
RBI
Advance Tax Payments
1/30/13
Increased Credit Off-take
1/30/13
Repercussions
•
The amount of which banks parked via reverse repo fell from 47530 crores to 4540 crores in 3 days Call rates hardened marginally from 3.85% to 4.2 % The daily bank borrowing from RBI has remained above Rs 50,000 crore through the week ended June 25. Excess liquidity with the country’s largest lender(SBI) has already come down from Rs 44,000 crores at the end of March to Rs 20,000 crores now Liquidity fears rose in the market after State Bank 1/30/13 of India (SBI), a rare issuer of short-term paper,
•
•
•
•
•
RBI allowed banks to avail of additional support under the liquidity adjustment facility (LAF) RBI opened a second window to facilitate borrowing under the LAF( SLAF) Till July 2, banks have been permitted to avail of support of up to 0.5 per cent of their net demand and time liabilities Banks can seek a waiver for any shortfall in 1/30/13 maintenance of the prescribed 25 per cent
Measures taken by the RBI
•
•
•
Measures taken by the RBI (contd.)
•
RBI has already infused 10000 crores into the system through bond buyback, buying back
securities ahead of their redemption schedule in the next few weeks in June
•
Plans to buyback another 10000 crores of bonds to inject liquidity into the system The repurchase will be funded from the current account surplus of the government.
•
1/30/13
•
There is around Rs 1,10,000 crores lying with mutual funds that can be tapped However, RBI has to keep in mind that sudden infusion of liquidity can trigger inflation If RBI does not act to ease liquidity immediately, the government needs to step in and spend aggressively to bring back the money into the system RBI can cut the CRR to ease pressure. A cut by
Measures that can be adopted
•
•
• 1/30/13
Measures that can be adopted (contd.)
•
Can buy back bonds through Open Market Operations RBI can go for a staggered payment government bond auction Not to access the auction money now
1/30/13
•
•
•
References
• •
http://beta.profit.ndtv.com/news/show/rbi-monitoring-l http://www.blogofindia.in/3g-bids-fuel-liquidity/
http://www.thehindubusinessline.com/2010/06/19/stor
•
1/30/13
Thank You
1/30/13
doc_319388985.pptx
Describes what is liquidity, what are the indicators of liquidity, what the factors affecting liquidity, it also examines the reasons of liquidity crunch in May June 2010, what are measures taken by RBI to ease the liquidity crunch.
Liquidity Crunch in May-June 2010
MBF M
Click to edit Master subtitle style
1/30/13
Issue
Within a short span of a fortnight around end-May 2010 early-June, the liquidity situation drastically reversed from abundance to shortage
1/30/13
Flow of presentation
Ø Ø Ø
Liquidity Liquidity Indicators Reasons for liquidity crunch (in May ’10) Repercussions Measures taken Further Measures
Ø Ø Ø
1/30/13
Liquidity
•
The amount of money floating in the system that is available to all participants in the financial markets, which includes individuals, corporate entities and the government
1/30/13
Factors affecting Liquidity
•
Influenced by demand and Supply of money in the system There are three ways in which liquidity gets affected
–
•
Borrowings of the government Increased borrowings by the corporate sector
–
Reduction of availability of the rupee by the central bank by buying rupee and 1/30/13 selling a foreign currency such as the
–
Liquidity Indicators
•
Repo rate: The rate at which the RBI lends money to commercial banks Reverse repo rate: The rate at which Reserve Bank of India (RBI) borrows money from banks. Call rate: Interest rate that banks charge to brokers to finance margin loans to investors.
1/30/13
•
•
Liquidity Crunch : Data
•
Repo and reverse repo outstanding amounts available with the RBI also indicate the liquidity situation Excel sheet
Source : RBI website
•
Govt. deposits in RBI Balance Sheet
1/30/13
Call Rate % (May-June 2010)
6
5.5
5
4.5
4
3.5
3
2.5
2
1/30/13
Source: RBI website
Reasons For Liquidity Crunch
1/30/13
The 3G auction effect
•
9 bidders competing for three to four spectrum slots in 22 zones across the country The telecom companies had to pay around Rs 67,719 crores to the government within 10 days after the auction ended Banks lent over Rs 60,000 crores
•
1/30/13 •
The 3G auction effect
•
To fund this loan demand, they withdrew their investments in liquid schemes of mutual funds, further adding to the liquidity woes. This led to a liquidity squeeze with the flow of funds from banks and the markets to the government’s coffers.
1/30/13
•
An Example
Highest bidder in 3G auction (Rs 12,295.46 crores) Bharti Airtel Call market
Borrow from other banks Borro w
Govern ment
Bank
Borrow from RBI, Increase in Repo
1/30/13
Acquisition of Zain communic ations. ($7.9
RBI
Advance Tax Payments
1/30/13
Increased Credit Off-take
1/30/13
Repercussions
•
The amount of which banks parked via reverse repo fell from 47530 crores to 4540 crores in 3 days Call rates hardened marginally from 3.85% to 4.2 % The daily bank borrowing from RBI has remained above Rs 50,000 crore through the week ended June 25. Excess liquidity with the country’s largest lender(SBI) has already come down from Rs 44,000 crores at the end of March to Rs 20,000 crores now Liquidity fears rose in the market after State Bank 1/30/13 of India (SBI), a rare issuer of short-term paper,
•
•
•
•
•
RBI allowed banks to avail of additional support under the liquidity adjustment facility (LAF) RBI opened a second window to facilitate borrowing under the LAF( SLAF) Till July 2, banks have been permitted to avail of support of up to 0.5 per cent of their net demand and time liabilities Banks can seek a waiver for any shortfall in 1/30/13 maintenance of the prescribed 25 per cent
Measures taken by the RBI
•
•
•
Measures taken by the RBI (contd.)
•
RBI has already infused 10000 crores into the system through bond buyback, buying back
securities ahead of their redemption schedule in the next few weeks in June
•
Plans to buyback another 10000 crores of bonds to inject liquidity into the system The repurchase will be funded from the current account surplus of the government.
•
1/30/13
•
There is around Rs 1,10,000 crores lying with mutual funds that can be tapped However, RBI has to keep in mind that sudden infusion of liquidity can trigger inflation If RBI does not act to ease liquidity immediately, the government needs to step in and spend aggressively to bring back the money into the system RBI can cut the CRR to ease pressure. A cut by
Measures that can be adopted
•
•
• 1/30/13
Measures that can be adopted (contd.)
•
Can buy back bonds through Open Market Operations RBI can go for a staggered payment government bond auction Not to access the auction money now
1/30/13
•
•
•
References
• •
http://beta.profit.ndtv.com/news/show/rbi-monitoring-l http://www.blogofindia.in/3g-bids-fuel-liquidity/
http://www.thehindubusinessline.com/2010/06/19/stor
•
1/30/13
Thank You
1/30/13
doc_319388985.pptx