The Hindu Business Line : Call rates surge; touch intra-day high of 80%

Mumbai March 30 As the curtains fell on the financial year 2006-07, banks were hard pressed for cash as call rates touched an intra-day high of 70-80 per cent. Call rates ended the day at 40-50 per cent against 10-11 per cent on Thursday.

Even as traders were packing up, the Reserve Bank of India hiked the repo rate by a quarter percentage point to 7.75 per cent and increased the cash reserve ratio by 50 basis points to 6.50 per cent after market hours. And they were not amused.

Dealers said banks were not lending in the overnight call market, as they would have to set apart funds from profits for higher provisioning on their overnight lending.

On Friday, banks borrowed Rs 30,650 crore from the RBI through the repo window at 7.5 per cent. The RBI also sucked out Rs 1,765 crore through the reverse repo window.

Bond prices down

The cash squeeze pushed down bond prices. The 8.07 per cent-10 year-2017 paper opened at Rs 100.85 (7.94 per cent YTM) and closed at Rs 100.42 (8 per cent YTM), against Monday's close at Rs 100.65 (7.97 per cent YTM).

The recently auctioned 6.65 per cent-2 year-2009 paper opened at Rs 97.53 (8.01 per cent YTM) and closed at Rs 97.50 (8.02 per cent YTM), against the previous close of Rs 97.47 (8.03 per cent YTM).

Rupee gains

The rupee, however, gained against the dollar, as traders were found squaring positions ahead of the end of the financial year. The domestic currency opened 43.63/65 against the dollar and closed at 43.47 against Thursday's 43.76/77.

During the day, the RBI announced measures to soothe the tight liquidity conditions. With effect from April 3, the State development loans (SDLs) will be treated as eligible securities under the LAF repo operations, said an RBI press release.

The central bank had announced the move in the Annual Statement of Monetary policy for the year 2006-07. The decision will help banks, running short of gilt, to borrow more from the RBI under the repo facility.

State development loans

On the repo window, banks borrow from RBI against the collateral of gilts and now SDLs.

"The acceptance of SDLs would widen the collateral base for LAF," said the RBI's release.

Most banks have been unable to borrow from the RBI's repo-window at 7.5 per cent during the recent cash-crunch as they do not have surplus SLR securities (government securities) to place as collateral.

With cash being scarce, banks have pruned their SLR holdings to a little over 25 per cent.

At the request of the market participants, the Reserve Bank of India will also conduct an additional liquidity adjustment facility (LAF) on March 31 though there will be no trading.

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