Liquidity is comfortable, RBI steps pre-emptive: bankers

Liquidity is adequate and the steps announced by the RBI are to provide comfortable availability of cash to banks, SBI’s chief financial officer SS Ranjan said

Bankers do not see too much liquidity pressure in the face of an expected Rs1 lakh-crore cash outgo due to the huge third generation (3G) licence fees and advance tax payment, even as the Reserve Bank of India (RBI) allowed lenders to borrow more funds from it through a new window, reports PTI.

"It is a pre-emptive measure by the central bank to ease any perceived liquidity pressure," State Bank of India (SBI) chief financial officer S S Ranjan told PTI today.

 Liquidity is adequate and the steps announced by the RBI are to provide comfortable availability of cash to the banks, Mr Ranjan said.

Echoing similar view, Bank of Maharashtra (BoM) chairman and managing director Allen C A Pereira said such measures would provide comfort level to the banks. At this point, the banking system is flushed with funds and credit off-take is also low. So, there is no apprehension in the market, he said.

The central bank, had yesterday, opened another window, the second liquidity adjustment facility (SLAF) which will be conducted on a daily basis up to 2 July  2010. The SLAF will be conducted between 4 pm and 4.30 pm.

At present, RBI offers only one such window to banks between 9.30 am and 10.30 am everyday to lend or borrow from it against government securities.

The apex bank manages daily money supply in the system through LAF. If a bank surrenders government securities to borrow from RBI under SLAF, and in the process its holding of such papers come under the stipulated amount, the banks would also not be charged penal interest.

Currently, banks have to hold 25% of its deposits in government securities, gold or cash to meet the stipulated requirement, technically called statutory liquidity ratio (SLR). As such, indirectly banks are given freedom to have SLR at 24.5%, a 0.5 per cent reduction from the present requirement.

The second window may inject over Rs20,000 crore-0.5% of the total bank deposits of about Rs45 lakh crore at present. Most of the banks would be having SLR in between 27%-28%, Mr Pereira said, adding banks already have some headroom even over the current SLR.

Crisil principal economist D K Joshi said the RBI measures are aimed at easing liquidity, although there would not be much pressure on the banks.

"I feel liquidity is quite comfortable, nevertheless the facility would help the banks to tide over temporary problem," Punjab & Sind Bank chairman and managing director G S Vedi said.

However, Bank of Baroda (BoB) executive director R K Bakshi said banks face liquidity pressure on account of the huge 3G spectrum licence fees and advance tax payouts to the government by telecom and other companies.

"Liquidity has really become tight in the last few days. 3G auction taking double the amount than what was expected earlier will put pressure on liquidity...The RBI step will definitely help."

The second LAF window is importance since banks towards the close of the day would know exactly how much is their actual demand for cash after taking money from each other from the call money market.

Currently, the repo rate, which is the short-term lending rate of RBI, is 5.25% and LAF auction takes place at the repo rate.

The fiercely competitive auction of 3G spectrum, which ended last week, offers Rs67,719 crore to the exchequer, almost double of the Rs35,000-crore projected in the budget.

This together with payments for broadband wireless access (BWA) and expected advance tax for the first quarter of this fiscal may result in Rs1 lakh crore outgo from the system.

"The latest assessment of liquidity conditions suggests that there could be temporary liquidity pressures in the market largely due to changes in government balances on account of advance tax payments and 3G auctions," RBI said in statement.

SBI chairman O P Bhatt had also admitted that surplus liquidity is gradually disappearing from the system that has forced it to raise certain segments of short-term corporate loans by 0.25%-0.50%.

However, Mr Bhatt indicated that there would not be general interest rates hike immediately as liquidity is enough despite expected payment for 3G auction and upcoming advance tax.


Link domestic fuel prices with global trend: Montek

The government has already formed an Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee on fuel price deregulation. The EGoM is expected to meet on 7th June

The Planning Commission has pitched for linking of domestic fuel prices with those in the international market saying it is necessary for country's global "economic reputation," reports PTI.

"India's international economic reputation requires us to say that fuel prices are going to be linked to global prices.

I think that linkage (of fuel prices with global prices) is unavoidable," Planning Commission's deputy chairman Montek Singh Ahluwalia told PTI.

Asked about the affect of deregulation of fuel prices on poorest of the poor, he replied, "If you want to give (subsidised) kerosene to BPL households, give them."

"I personally think we should explore that possibility (of giving direct subsidy) as elsewhere in the world that is regarded as very positive thing to move to the direct (fuel) subsidy," he said, when asked about leakages and diversion of subsidy on fuel.
The government has already formed an Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee on fuel prices deregulation. The EGoM is expected to meet on 7th June.

Besides freeing petrol and diesel prices from government control, dealing with the revenue lost on selling domestic LPG and PDS kerosene below cost is also on agenda of the EGoM.

For petrol and diesel prices to be freed from government control, rates would have to be raised by over Rs6 a litre.

Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum lose Rs255 crore a day by selling fuel below cost. They may end the fiscal with a Rs90,000-crore revenue loss.

They currently sell petrol at a loss of Rs6.07 a litre, while the loss is Rs6.38 per litre of diesel, Rs19.74 per litre of PDS kerosene and Rs254.37 per 14.2-kg LPG cylinder.






Are weak commodity prices foretelling something?

Prices of metals and crude have been on a freefall while gold is running higher. This may not be what the bulls wanted to see

Over the past two weeks, all eyes have been focused on the declining equity markets all over the world. But equally battered have been commodities like metals and crude oil. While the International Monetary Fund (IMF) and the European Union’s $1-trillion rescue package to bail out European nations sparked fears of inflation, this is not reflected at all in commodity prices. The fear of lower demand is overwhelming every other factor.

High grade copper has dipped 14% since the start of this month—from $35.9 to $30.9/lb while three-month lead has slipped to $1,792 a tonne from the $2,100 levels from February 2010. 

Aluminium is down from $1.04 per pound (as on 26 April 2010) to $0.80 per pound on 25 May 2010. On the LME, primary three-month nickel has dipped to $21,625 per tonne from $25,500 in March. Crude oil has dipped 20% from $88.36 from 3 May 2010 to $70.73 per barrel as on 26 May 2010.

Since significant price changes lead the economic trends, are softer commodity prices suggesting a weak economy ahead? “There are concerns about the global economy, so the demand for metals will go down. Money is chasing safer assets like gold. The US and Europe are anyway in trouble and China is a new concern. China is in the grip of a bear market. The growth agents of the world are appearing to be fatigued. It will take more time to solve this problem,” said Jagannadham Thunuguntla, equity head, SMC Capitals Ltd.

“Until the uncertainty in the euro persists, commodity prices will continue to be volatile. We have still not seen a recovery in US markets. Demand and prices of base metals may go down,” said Atul Shah, head-commodities, Emkay Global Financial Services.

Non-precious metals’ trading value dipped 26% at Rs9,59,404 crore this year from Rs12,91,761 crore in 2009 on the Multi-Commodity Exchange (MCX) index.

“On the base metal front, we may see 5%-10% downside in the next quarter. Base metals may only see some stability if there are some positive cues from the eurozone. Crude may dip to $62 to $60 (a barrel),” said Pragnesh Jain, research analyst, Anand Rathi.

China’s dip in industrial production growth at 17.8% in April 2010, which was lower than what analysts expected, indicates a lower demand for base metals. Naturally, gold is emerging as a safe heaven for wary investors. The yellow metal rose to an all-time high of Rs18,629 per 10 gram in the Indian markets on 26th May.

According to a report published by the World Gold Council (WGC), India and China will continue to grow, driven by jewellery demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to 193.5 tonnes. In China, demand proved resilient, rising 11% in Q1 2010 to 105.2 tonnes.

“Concerns over Greece’s public finances and debt contagion fears in Europe have led to strong buying, particularly for gold coins, bars and gold exchange-traded funds (ETFs) during May, which may show up in the Q2 2010 figures. While momentum in ETF tonnage paused during Q1 2010, gold ETF flows started to rise strongly again in April and May as investors sought less volatile investments to protect their funds against economic turmoil. On 20th May, SPDR Gold Shares (GLD) held a record 1,200 tonnes, with a value of $46.88 billion,” stated the WGC report.

"Commodities were a bull-market phenomenon and the new normal is going to be a lower range of pricing,” said Tim Schuler, investment strategist with The Permal Group, the hedge fund arm of large US investment manager Legg Mason. Speaking at the Legg Mason Investment Symposium in Sydney, Permal said, “Commodity prices will not see the heights of the pre-crisis years again.”

But not all commodities will see a fall in prices. Gold will remain high, said Mr Schuler. “Gold does not behave like other commodities in the market. Gold is a store of value.” Permal is a $20-billion multi-manager of hedge funds and has been around for more than 30 years.

The question is, does a combination of strong gold prices and weak commodity prices mean that business recovery is really weak and inflation expectations are high? That would be a recipe for stalled growth.


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