Excess liquidity with banks to fuel inflation, speculation in stock market

Excess liquidity in the banks and financial institutions is going to push the inflation, and also the stock market speculation, up.

The 91-day Treasury Bills (TB) weighted average interest rates has dropped to bottom low of 0.0164 per cent yesterday on November 26, according to the central bank.

The lowest short term excess liquidity management tool – the 91-day TB –weighted average interest rates reflects low borrowing from the banks and financial institutions, which are parking their money at almost zero interest at the central bank.

The excess liquidity in one hand will fuel the inflation that is already expected to stand at two digit – due to CA election and its expenses – and increase the speculation in the stock market.

The 91-day Treasury Bills (TB) weighted average interest rates had stood at 9.65 per cent on January 11, 2011, due to tight liquidity then But the rate has dropped to the lowest on November 21, due to surplus liquidity at present.

The central bank has issued reverse repo four times and is issuing the fifth Rs 10 billion-worth reverse repo today to absorb excess liquidity from the banks and financial institutions and contain the inflation. But reverse repo is a short term measure to suck the liquidity from the market as the liquidity will again flow back to the market soon. The banks and financial institutions purchase treasury bills from the central bank as they have excess liquidity and low lending.

The central bank has already absorbed Rs 35 billion from the market through reverse repo before the this fifth reverse repo in the current fiscal year. With today's reverse repo

The central bank has calculated that there is around Rs 50 billion liquidity in the banking system that will increase the inflationary pressure.