Liquidity crunch could indicate reviving economy: Credit Suisse

MUMBAI: The liquidity shortage in the money market could be an early indicator of a reviving economy as month-on-month credit growth have started to track historic trends as 15 months of below trend growth, Credit Suisse analysts Neelkanth Mishra, Prateek Singh and Ravi Shankar said in a note on Tuesday.

Tight liquidity has been the number one concern in the money markets with the ten year bond yield at a rate higher than it was a year ago despite a total of 125 basis point repo rate cut by the Reserve Bank of India ( RBI) in the last one year.

RBI governor Raghuram Rajan is meeting bankers later today to discuss the lack of cash in the banking system.

The Credit Suisse analysts pointed out that three month commercial papers have risen 125 basis points from below 8% to more than 9% in the last two months even as the total amount of money banks have borrowed from RBI’s repo window has increase from less than Rs 1 lakh crore in October to Rs 1.5 lakh crore in January.

One basis point is 0.01 percentage point.

The analysts said that the most popular explanation for the tighter liquidity was RBI selling dollars and sucking up rupee liquidity to support the Indian currency and higher borrowing from state governments. However, India’s foreign exchange reserves increased to $349.15 billion in the week ended January 29 up from $347.56 billion in the previous week.

Credit Suisse expects India to have a $2 billion balance of payment surplus at the end of the current fiscal year riding on debt inflows from foreign institutional investors (FIIs), NRI deposits, exports from the information technology sector and higher foreign direct investment.

Also, though market borrowing by states is up 26% in the current fiscal year, the aggregate of centre and state borrowing is down year-on-year, the analysts said adding that the liquidity crunch could be because of higher demand for credit.

“We find that credit growth changes month-on-month are starting to track 15 years seasonality after last 15 months staying below trend. The economic pick-up visible in oil demand also shows up in credit growth. Historically, it has been normal to see a liquidity shortage in January, which then eases by March,” Credit Suisse said.