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Our Bureau

Liquidity continues to be tight

Mumbai , Dec. 28

Tight funds supply continues to keep the inter-bank call money rates on a record high plateau. The overnight interest rates, which were traversing in the range of 6.20-6.50 per cent in the beginning of the month, have touched a record 12.75-13 per cent in the last two trading sessions.

Money market dealers said liquidity conditions continue to be tight. On Thursday, banks borrowed over Rs 34,000 crore through RBI's repo auctions.

The first phase of the hike in cash reserve ratio (CRR), effective December 23, has drained out over Rs 6,700 crore from the banking system. Dealers expect the same situation to continue until the New Year rings in and fresh supply of funds restore buoyancy in the market.

Auctions

Call rates are clearly a function of liquidity. Apart from the CRR-induced outflow, the advance tax outgo, which has begun, also impacted liquidity, said Mr P. Mukherjee, Senior Vice-president-Treasury, UTI Bank. The RBI had hiked the CRR by 50 basis points to 5.50 per cent.

According to the market players, there is an urgent need for funds by banks. "Liquidity continues to remain a concern and the call rates are likely to stay in the same range this week," said a dealer at a private bank. Call rates are now higher than the prime lending rates of banks, which are at average above 11.50 per cent.

In the first one-day repo auction under LAF, the RBI received and accepted 43 bids for Rs 22,450 crore on Thursday. There were no bids for reverse repo auction. In the second reverse repo auction the RBI accepted and received one bid for Rs 10 crore and 10 bids for Rs 13,670 crore in the repo auction.

Dollar Inflows

The squeeze in liquidity also affected the bond market where prices fell by around 10 paise. Total traded volumes in the market were low at around Rs 730 crore. Advance tax outflows of around Rs 35,000 crore are yet to re-enter the system and market participants are not taking major positions.

Tight liquidity was also one of the reasons that pushed the rupee to close at 44.25/26, which is a 10-month high.

This level was last seen in March 2006. Forex dealers said that with the rupee growing stronger and increasing dollar inflows, it is likely that the RBI would intervene in the forex market.

Related Stories:
Call rates hit new high of 12.5 pc
Logic behind the CRR hike

More Stories on : Short Term Instruments | Interest Rates

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