The Hindu Business Line : Call rates touch 75% intra-day; RBI steps in

Mumbai March 21 The Reserve Bank of India stepped in on Wednesday to cool the overheated call money market where rates continued to soar, touching an intra-day high of 75 per cent.

The apex bank allowed banks to use funds borrowed from its own repo window for their inter-bank lending operations.

"Such, inter-bank lending is part of normal money market functioning that enables daily liquidity management by market participants having temporary mismatches," said the central bank's statement, which was issued after market hours.

The RBI's clarification came as a breather for banks, which are currently in a tight squeeze for cash. The inter-bank call rates were at a 10-year high for the second consecutive day at 60-70 per cent on Wednesday.

Banks on Wednesday borrowed Rs 43,075 crore from the RBI through its repo window.

The central bank, however, emphasised that market participants could not take recourse to resources from the repo window for funding credit needs of their customers.

Bankers observed that earlier PSU banks would not lend the funds that they borrowed from the repo market in the call money market. The RBI's move has now given them the `go-ahead' signal.

"Banks can now borrow from the RBI at 7.50 per cent through its repo window, (provided they have excess statutory liquidity ratio) and use the funds in the call money market to lend to other banks which are in need of cash, at a mark-up rate," said Mr C.E.S. Azariah, CEO, Fixed Income Money Market and Derivatives Association of India.

News of the three-day bank strike being deferred also eased concerns about the cash shortage, as banks had been covering in anticipation of the shutdown next week. Analysts now expect call rates to ease to 15-20 per cent in the next few days.

Meanwhile, the shortage of cash pushed the rupee to close at a 19-month high of 43.45, up by about 30 paise, from the previous close of 43.75.

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