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7-day repo may see call rates easing

Poornima Mohandas

Mumbai , March 30

AS the new seven-day repo facility gets stabilised, inter-bank call money rates are expected to fall and g-secs and bonds may find renewed trading interest in the coming fiscal.

According to Mr Sudhir Joshi, Head-Treasury, HDFC Bank, "With the seven-day rate now pegged at 4.5 per cent, the overnight call money rate will have to fall. It may dip below 4 per cent levels." Currently call rates range is between 4.25-4.50 per cent.

As banks are wary of locking in their entire surplus funds in the seven-day repo, their lending in the call money market is set to rise even as there are few takers for the funds in the surplus liquidity environment. With supply of funds to be higher than demand, a fall in the call rates is foreseen.

Other stimuli for a bond rally include the procedural ease and increased trading options accompanied with the implementation of the Real Time Gross Settlement System and DVP III, said a debt market analyst. DVP III, which is one step above the present DVP II system, will permit securities bought in a day to be sold on the very same day multiple times and allow rollover of repos.

Banks have been tepid in their response to the seven-day repo auction, a facility by which RBI sucks out liquidity in return for securities for a fixed period of seven days. The new facility, which commenced on Monday, has seen funds worth just over Rs 2,000 crore going into everyday.

Majority of surplus liquidity of over Rs 45,000 crore went into the one-day repo facility itself. The one-day facility will be done away from April 2.

Banks are expected to take a couple of weeks to adjust to RBI's newly introduced seven-day repo facility. "It will be at least two weeks before people fine-tune their mindset to the seven-day repo concept. Players will have to manage their daily cash positions in a more planned manner," said Mr K.V. Ramesh, Senior Vice-President, Treasury, Global Trust Bank.

The seven-day repo, should see levels of Rs 30,000-35,000 crore in the weeks to come, he added. This is lower than the levels of over Rs 50,000 crore absorbed by the central bank through the one-day repo in recent weeks.

Different banks have different strategies in adjusting to the seven-day repo. While some plan to phase out their cash deployment in it, others plan to deploy only a part of their of surpluses in it.

Said the treasury head of a PSU bank: "We cannot put away all our surplus funds into the seven-day repos since this would mean that we would be blocking away the entire amount. We will put 50-60 per cent of our daily surpluses into the seven-day repo and deploy the remaining in the call money market. We also need to keep funds aside for trading activities and other exigencies."

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