MUMBAI, January 17: Close on the heels of the Reserve Bank of India's tight money policy, announced on Friday, interest rates in the inter-bank call money market on Saturday went through the roof to touch an all-time high of 140% from the previous day's closing level of 5-6%.The inter-bank call market - where banks lend and borrow for their reserve requirements to be maintained with the RBI - turned panicky following the RBI move to hike the bank rate by 200 basis points to 11 per cent and the cash reserve ratio (CRR) by 50 basis points to 10.5 per cent. The rupee-support package is expected to push up interest rates all over. The overnight call money rates opened in the region of 25 to 30 per cent against yesterday's close of five-six per cent and spurted to touch an all-time high of about 140 per cent in the morning session itself. ``There were quotes at 150 per cent but I do not think deals were done at that level,'' said a dealer.
``It was a panic driven market today as no one knew how to react to
the RBI measures,'' a dealer in a brokerage firm said. One of the State Bank of India associates lent at 140 per cent to a small foreign bank. However, as the day progressed, sanity returned to the money market as nervousness declined and call rates fell to 40 per cent before it finally closed at 20 per cent. ``Most deals were done in the range of 40 to 60 per cent today. On Monday, I think the rates will open at 15-20 per cent and will continue at these levels,'' market sources informed.
According to market sources, although traditional lenders like IDBI and UTI were present in the market, it was private sector mutual funds like DSP Merrill Lynch and Jardine Fleming which lent funds at 70 to 80 per cent on Saturday. As a result of Friday's RBI measures, liquidity is expected to be dried up. If the changes in refinance terms are also included, the total outgo from the system will be around Rs 6,000 crore. The new directives from the RBI will make imports more costly. ``Instead of adopting these measures,
the RBI should have allowed the rupee to fall freely by its own market mechanism,'' said a treasurer.
According to an analyst with Lloyds Brokerage, central bank normally raised interest rates to cool overheated economies and to rein in inflation. ``The RBI has done this purely to prop up the rupee,'' he said about the new RBI measures. ``It is a short-term measure that can cause long-term harm.''
Gilt also falls
Government securities (gilts) also reacted "violently" with prices crashing on distress selling by banks in the securities market. The price of the 12.59 per cent gilt maturing in 2004 fell by Rs 2.50 today to Rs 98.00 while the 12.50 per cent gilt maturing in 2004 fell to Rs 99.50 from Rs 100.35.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
