The pressure on liquidity appears to be easing now; but the second half of this fiscal is likely to witness renewed concerns on banks’ liquidity position
For the moment, banks in the country are breathing easy, after witnessing prolonged suffocation on the liquidity front until a few weeks ago. The limited action in the central bank's liquidity adjustment facility (LAF) in the past few days is reflective of this. However, the question is whether this liquidity position is sustainable over the second half of this fiscal year.
Some analysts are not entirely comfortable with the cash position of banks. In fact, Nomura Financial Advisory and Securities mentions in its report that a sharp rise in currency in circulation will add to the liquidity strain by the second half of this fiscal. Rising economic activity, coupled with high inflation, has led to a pick up in currency in circulation. This will gain further momentum in the latter half of this year on account of the festival season, food procurement and pick up in agro-based industrial activities, states the report.
"An increase in currency in circulation will likely be a further negative for systemic liquidity, which is already close to zero. We expect advanced tax outflows in mid-September and the seasonal increase in currency in circulation to add to liquidity pressures as we head into H2FY11, offsetting most of the gains from higher government spending," says the Nomura report.
This is contrary to the normal phenomenon when a surge in money circulation tends to ease liquidity pressures in the system. Given the high level of inflation and the festive season around the corner, people will prefer to keep large cash levels with them. A banking sector analyst from BRICS Securities told Moneylife, "During inflationary times, currency with people is at a high - strange howsoever it may seem. There will also be (the) seasonality effect because during a festive season, cash in hand with the people goes up. The more the currency with people, the less there will be with the banking system."
Clyton Fernandes, banking analyst at Anand Rathi, feels that the liquidity position may change depending on how the credit demand in the second half pans out. "The liquidity position is looking comfortable as of now because credit demand has not picked up across segments - it is still tilted towards infrastructure and housing. When it starts getting broad-based in the second half, that is when liquidity will tighten a lot more."
Deepak Tiwary, banking sector analyst with KR Choksey said, "Currently there is not much pressure on the system. Except for Monday, when banks borrowed heavily from the LAF window of the RBI, banks have been sitting pretty on the liquidity front. However, some banks might have to resort to borrowing." He feels that if liquidity problems start to pose a serious challenge, the RBI will intervene in the way it did in June.
DK Joshi, chief economist at CRISIL, has a different perspective on the situation. He believes that the liquidity situation will ease further from the current level when government spending picks up in the second half of this year.
The Paradip port iron ore berth project awaits financial closure as port authorities are yet to obtain environment clearance for the project
A number of Indian infrastructure projects are inching along towards completion due to environmental issues. The Paradip iron ore berth project, which was the first Public Private Partnership (PPP) project in the port sector under the New Model Concession policy, awaits financial closure, as environment clearance is still pending.
Gammon Infrastructure Projects Ltd (GIPL), in a consortium with the Noble Group Ltd and State-run trading company MMTC Ltd is developing the iron ore berth at Paradip port. The total project value stands at around Rs590 crore. The project is being developed on a build-operate-transfer (BOT) basis with concession period of 30 years, including a construction period of three years.
The project is being developed through a Special Purpose Vehicle called Blue Water Iron Ore Terminal Pvt Ltd. The project was awarded in July 2009. The venture is expected to add 10 million tonnes per annum capacity to Paradip port.
According to company sources, all the necessary procedures for the project's financial closure are in place. An environment go-ahead is necessary to formally conclude the financial closure for the project.
GIPL will be raising funds for this project from international banks. The company refused to divulge any further details on these lenders. The project would be financed through a 75:25 debt-equity ratio.
GIPL is positive that the port authorities would be able to obtain the green clearance within a month. The financial closure is expected to be achieved within a couple of weeks thereafter.
This was the first project under PPP to be implemented in the port sector as per the New Model Concession policy approved by the Cabinet. The tariffs for this project had been fixed by the Tariff Authority of Major Ports (TAMP). Paradip Port Trust floated global tenders for construction of a deep-draught iron ore berth on a BOT basis, as part of the PPP scheme of the Centre. The GIPL consortium was selected amongst five short-listed bidders.
In 2008, the New Model Concession policy for private sector participation projects replaced the Model License Agreement, which had been in use in major ports since March 2000. The decision was expected to bring about enhanced bankability of private sector projects in major ports, standardisation of financial and commercial terms for award of concessions for port projects, speedy decision-making and equitable and efficient allocation of risks between the contracting parties. This 2008 Model Concession Policy is also expected undergo certain significant changes soon.
While modifications in the policy might cover issues like bankability and risk allocation, the government needs to emphasise more on green issues too. Port capacity expansion is crucial to cater to the growing raw material requirements of the developing Indian economy.
Global market cues point out to a cautious-to flat opening for the Indian market today.
The Indian market was in a consolidation mood on Thursday after three days of gains. The session started on a positive note and was range-bound for a major part of the trading day. However, profit-booking in the last half-hour saw the benchmarks giving up all gains accrued in the session. The Sensex ended at 18,172, down 44 points (0.2%). The Nifty shut at 5,447, down 20 points (0.3%).
Annual food inflation fell marginally to 9.53% for the week ended 24th July as prices of vegetables, especially potato and onion declined government data on Thursday showed. Food inflation, which was 9.67% for the week ended 17th July, remained in single digit for the second consecutive week.
Meanwhile, fuel inflation for the week ended 24th July stood at 14.26% against 14.29% in the previous week.
The Dow fell 5 points (0.05%) to 10,674.98. The S&P 500 fell 1 point (0.1%) to 1,125.81. The Nasdaq fell 10 points (0.4%) to 2,293.06.
Planning Commission deputy chairman Montek Singh Ahluwalia on Thursday said the current high level of inflation at 10.55% is a problem, but it should come down to a comfortable level of 6% by December.
"Inflation right now is a problem and the government recognises that...In my judgment by the end of this year it will not be what it is now. It will be much close to 6%, which most people regard as a comfortable level," Mr Ahluwalia said at a panel discussion.