The Hindu Business Line : Bond prices crash; call rates may rise to 6% in a week

Mumbai, July 31 Bonds crashed by almost 60 paise while yields rose about 10 basis points on hike in Cash Reserve Ratio (CRR) by the Reserve Bank of India.

Market players have said that the central bank has been hawkish in its tone. Apart from a CRR hike, the RBI has also scrapped the Rs 3,000 crore cap on daily reverse repo under the LAF, effective August 6 to absorb the excess liquidity in the system.

CRR refers to the RBI holding back a percentage of bank deposits in cash to control liquidity in the system.

Inter-bank call rates closed at 0.1-0.2 per cent today but it is expected to rise up to 6 per cent in a week. The hike in CRR will suck out Rs 16,000 crore from the banking system, impacting the call rates.

The Reserve Bank has, however, retained the discretion to re-impose a ceiling as appropriate and has the flexibility to conduct repo or reverse repo auctions at a fixed rate or at variable rates as circumstances warrant, said the First Quarter Review of the Annual Policy Statement on Monetary Policy for the Year 2007-08.

“The RBI has taken measures to control the excess cash in the system. The liquidity will now come under pressure with the RBI sucking out surplus cash from the banking system. In the next one week, the 10-year yields are expected to be in the range of 7.8-7.9 per cent,” said Mr Anoop Verma, Dealer, Development Credit Bank.

The 7.49 per cent-10 year-2017 paper opened at Rs 98.15 (7.76 per cent YTM) and closed at Rs 97.61 (7.85 per cent YTM) on Tuesday against the previous close of Rs 98.18 (7.76 per cent YTM).

Dealers expect around Rs 27,000 crore to be sucked out of the system on CRR hike, market stabilisation scheme auctions and other auctions. “The yield curve is expected to flatten with the 91-day and 364-day yields now likely to align higher,” said Mr Mohan Shenoi, Group Head-Treasury, Kotak Mahindra Bank.

Surplus liquidity had forced the call rates to below one per cent levels for the past one month.

“The removal of the ceiling on reverse repo under the LAF will immediately bring the overnight call rate towards the lower end of the 6-7.75 per cent repo-reverse repo corridor and push the yield on money market rates higher,” said Mr Ajay Mahajan, Group President-Financial Markets and Institutions, Yes Bank.

Today, the Reserve Bank of India received bids for Rs 1,33,875 crore through the reverse repo window under the two sessions of Liquidity Adjustment Facility (LAF) while it accepted bids to the tune of Rs 3,000 crore. The central bank did not receive any bid through the repo window.

The central bank has also withdrawn the second Liquidity Adjustment Facility, which was introduced on November 28, 2005. “This will make banks more proactive and will force them to manage their inflows and outflows more efficiently,” said a dealer with a private bank.

Dealers also felt that banks were doing a lot of arbitrage by drawing at lower rates from call money and CBLO markets and passing the same to the RBI at a higher rate of interest.

The central bank has taken this step to do away with the arbitrage and also bring some kind of financial discipline, treasury officials said.