Rising cash at banks may ignite demand for bonds

09 April 2009

The Reserve Bank of India (RBI) is likely to put a cap on the amount it can accept from banks or lower the reverse repo rate as RBI's coffers are filled with an unprecedented Rs122,000 crore from banks on Monday, up from a net Rs.21,545 crore on 30 March.

Banks park their money with the RBI at a reverse repo rate of 3.5 per cent. However, not many are hopeful that an action by RBI will increase lending, because the 10-year government bonds in the range of 7 per cent are still an attractive option.

Banks are India's biggest bond buyers, holding more than 70 per cent of outstanding government debt.

RBI may impose a ceiling on the excess funds it receives under a daily liquidity-adjustment facility to offset bond yields and signal reticent banks to lend more.

In 2007, RBI had imposed a daily total limit of Rs3,000 crore ($600 million) under the facility, but removed the ceiling after inflation flared up last year.

However, slowing economic growth and a need to pull down interest rates in the market might prompt the central bank to reconsider such a move, analysts said.