The Indian rupee shed nearly 1% on Wednesday tracking declines in most Asian currencies, after Chinas stock market fell more than 6%. The call rates, an indicator of cash in the banking system, ended at 1% a level it last tested in early June 2000 and lower than 3.5 % at the last close.
The yield on the 10-year federal bond closed at 8.10%, unchanged from the previous close. Total volume was a thin Rs 2,325 crore ($568 million).
Cash has improved considerably due to the bond redemption earlier this week and that is boosting surpluses, said Arun Kaul, general manager-treasury, Punjab National Bank.
Inflows of Rs 20,000 crore into the banking system after the maturity of a bond on Monday along with suspected dollar purchases by the central bank in the currency markets over the past few days have increased rupee funds.
But traders are worried the central bank may tighten cash aggressively, either by issuing a large amount of market stabilisation scheme (MSS) bonds or by raising the limit for reserve requirements. It last sold MSS bonds on May 16 and it usually announces the sale for the coming week on Friday.
The market is worried the central bank may resort to some aggressive liquidity tightening such as a unscheduled bond auction or a reserve requirement increase, Kaul said.
According to the central banks web site, the total outstanding balance under the MSS was Rs 88,802 crore on May 18, below a self-imposed limit of Rs 1.1 lakh crore.
Traders said the Reserve Bank of India bought about $600-$650 million after the rupee surged on Monday to 40.28 per dollar, its highest since May 1998, on heavy dollar selling by a software services firm.
Fund raising by the domestic firms is picking up encouraged by an increase in cash supplies this week, bankers said. The central bank auctioned two bonds worth Rs 800 crore last week.
The RBI had sold MSS bonds in March to absorb cash created due to its intervention in the currency market to check the rupees rise.