Rupee to dollar: A lot of rupee liquidity has flown out of the system
Where has the RS 2 lakh-crore liquidity infused into the cash-strapped banking system by Mint Street since September this year, vanished? This was the question puzzling mandarins at the North Block even as they were readying to announce a first-of-its kind economy booster package last fortnight. For the hard-nosed bankers in the financial capital of Mumbai, the reply is simple: It has gone back to where it came from (the RBI). The reason: RBI’s reserves have depleted by $50 billion (Rs 2 lakh crore) since September 2008 when the first set of monetary measures like reductions in CRR (cash reserve ratio) and SLR (statutory liquidity ratio) were announced.
The money guzzlers
Mutual funds: Heavy redemption pressure may force many mutual funds to knock on the doors of banks
Real estate firms: Subdued festive season demand and job cuts in the economy may reduce the cash flow of developers
NBFCs: Banks and mutual funds have turned their back on them and they are severely in need of funds
Housing finance companies: All the outside sources of raising money have dried down. They need money for the core business of housing finance
SMEs: Severely impacted by demand destruction in both overseas and domestic markets. Need money to fund expansion and working capital
Retail lending: Bankers are exiting from small ticket size personal and twowheeler loan and other unsecured loans
Banking experts say one doesn’t have to hunt much to know where the money disappeared, as every dollar released by the RBI absorbs rupee liquidity of the same amount from the system. Agrees M.M. Agarwal, Executive Director of Axis Bank. “A lot of rupee liquidity is flowing out of the system because of dollar outflows from the country’s equity markets,” he says.The money has also found its way into many other market intermediaries like mutual funds, NBFCs, HFCs, real estate and other sectors. Abheek Barua, Chief Economist, HDFC Bank, says: “While the RBI has absorbed liquidity by releasing dollars, a part of it has also flowed into the areas like mutual funds, non banking finance companies and housing finance companies.” The mutual fund industry, faced with a crisis in its debt schemes, was the biggest beneficiary of the additional liquidity injected into the system. Similarly, real estate developers, who staked large amounts of money in anticipation of a further rise in property prices, found themselves in a credit crunch situation and had to be bailed out by the banks.
The liquidity situation of small and medium enterprises (SMEs) also worsened because of the global slump in demand. “They, too, had to be bailed out by banks,” says a banker.
“Many traditional sources like IPO and ECB dried up—resulting in greater reliance on the banking sector,” says Shubhada Rao, Chief Economist, YES Bank. The situation, however, is improving. “Bankers are slowly regaining the confidence to lend as the liquidity situation improves. There is surplus liquidity in the system to the extent of Rs 40,000-50,000 crore,” says Barua. Bankers however, are still cautious in lending indiscriminately to individuals or to companies,” says Rajesh Mokashi, Executive Director, Care Ratings.
If everything goes well, this additional money may lift the sagging morale of the Indian economy. But if the global situation deteriorates further and foreign investors flee in numbers, the liquidity will once again vanish into thin air. And the same questions may come to haunt us all over again.