The Hindu Business Line : Call rates zoom to 22% on liquidity crunch

Mumbai March 20 The overnight price of money (call rates) shot up to 22 per cent on Tuesday as banks started borrowing heavily from each other to cover shortage of funds.

Traders said that there were stray deals at as high as 50 per cent.

A few foreign banks were reportedly on the verge of defaulting on their cash reserve ratio.

The tense moments were palpable as the Reserve Bank of India extended the real-time gross settlement (RTGS) deadline from 5 p.m. to 6 p.m.

The strain on liquid cash also buoyed the rupee to close at 43.75 against the dollar - an 18-month high.

The call rates, which were at 6-6.10 per cent on March 1, moved up to 9.5-10 per cent on March 16 as advance tax outflows began taking a toll on liquidity.

"Around Rs 35,000 crore of advance tax outflows have put liquidity under strain," said Mr C.E.S. Azariah, CEO of Fixed Income Money Market and Derivatives Association of India.

"This has led to banks selling dollars to buy rupees in the forex market."

The rupee opened at 44.07 on Tuesday and closed at 43.75, up by 35 paise against Friday's close at 44.11/12.

The domestic currency has been hovering around 44.20-44.30 this month.

Banks borrowed Rs 35,250 crore through the RBI's repo window under the liquidity adjustment facility.

Dealers said that the tight liquidity conditions were a replay of what happened in December, when call rates had surged to 20 per cent on the back of advance tax outflows at the end of the third quarter.

"Higher corporate profitability has meant that the outflow at the end of the fourth quarter has been higher," said Mr K. Harihar, Head (Treasury), Development Credit Bank.

"Besides, dealers who were sitting short on cash may have come to cover their position."

The threat of a nearly week-long closure of banks due to a strike call and the subsequent holidays has also prompted banks to cover up cash requirements.

"Banks do not have excess of SLR securities to borrow from the RBI through the repo window, so they are headed to the call money market," said Mr Nitin Jain, Head, Fixed Income, ICICI Securities.

Bankers also said that the hike in CRR on December 9 and February 13 by a total of one percentage point to six per cent has drained Rs 27,500 crore from the system.

(CRR is the percentage of bank deposits locked up with the RBI.)

To curb inflation, the RBI also put in place an enhanced market stabilisation scheme to absorb excess cash by conducting auctions of dated securities as well as Treasury bills.

With inflation soaring to 6.46 per cent for the week ended March 3, liquidity management has become the apex bank's priority, said a Treasury official.

Market participants read the RBI's absence in the forex market on Tuesday as a signal that the central bank is determined to rein in inflation by not pumping rupees into the system.

Meanwhile, bond prices fell by around 40 paise with the 8.07 per cent 10-year 2017 benchmark paper closing at Rs 99.95 (8.07 per cent YTM) against Friday's close of Rs 100.35 (8.01 per cent YTM).

Dealers expect the RBI to step in and inject cash into the system this week to protect exporters' interests by curbing the appreciating rupee as well to shore up liquidity for banks.

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