Taxes, 3G may lead to cash crunch in June - bond dealers

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Indian banks are gearing up for a bout of tight liquidity in June when tax outflows coincide with payments towards the 3G spectrum leading to a fund shortfall in the money market.Treasury officials are already preparing to deal with the temporary shortage with options such as using their surplus government debt holdings to borrow cash from the Reserve Bank of India (RBI)."Banks have enough securities... and they can take money from the RBI at the repo rate but shorter dated securities might have some bearishness for sometime," said Mohan Shenoi head of treasury at Kotak Mahindra Bank.The worst case deficit estimate is about 250 billion rupees, said R.V.S. Sridhar, president and head of markets at Axis Bank.Short-term rates like one-year overnight indexed swaps (OIS) and commercial papers and certificate of deposits may rise 20-50 basis points during the crunch period, while overnight rates could jump 200 basis points to the repo rate of 5.75 percent.Government spending, which could lead to an inflow for banks, is one silver lining that dealers are looking at. The government had outstanding loans with the Reserve Bank of India (RBI) for three straight weeks until May 7, which could be spent to ease the system liquidity tightness at the time, they added.ALL EYES ON RBI"Even if there is a shortfall in liquidity, it will be for a very short time, as I expect RBI and the government to do something to manage that. The government may have surplus balance with the RBI which it can spend," said Ananth Narayan G, head of rates and credit of South Asia at Standard Chartered Bank.Banks parked 438.10 billion rupees in the RBI's reverse repo window on Monday indicating the extent of surplus cash in the banking system.Some traders are drawing comfort from the possibility that the 3G payments may be made in phases."At the moment I don't see any specific reason to be unduly worried. There will be some tightness if the 3G money goes and banks may have to borrow for a few days but we don't know if the money will go out in one shot," said Mahhendra Jajoo head of fixed income at Pramerica Asset Management.Bids for one set of nationwide 3G mobile spectrum licences in India reached 158.14 billion rupees on the 31st day of an auction, an indication the government could earn revenue of about 639 billion rupees from the auction.Besides outflows on account of 3G, market is also concerned about the impact of June quarter advance tax payment in middle of next month, estimated at about 300 billion rupees, dealers say.However, RBI should be aware of the possible impact on liquidity if both the outflows happen at the same time and may take suitable measures to avoid any disruptions, dealers said."The intention of RBI is not to squeeze liquidity. We had similar fears in March, but nothing happened then," said Ananth Narayan of Standard Chartered.(Editing by Ramya Venugopal)(For more business news on Reuters Money visit http://www.reutersmoney.in)
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