Signs of the money market tightening were evident on Tuesday as inter-bank call rates went up to 5.25-5.3% and banks picked up a net amount of Rs 5,575 crore from the Reserve Bank of India?s (RBI) special repo window.
The one-day call rate was slightly higher than the 5-5.25% reported on Monday when banks borrowed Rs 3,710 crore, against government securities, from RBI?s special window. Volumes in the call money market were, however, lower at Rs 8,415 crore on Tuesday, compared with Rs 11,394 crore the previous day, according to data from Clearing Corporation of India.
Says RVS Sridhar, president & head of markets with Axis Bank, ?The pressure on liquidity will be felt for the next few days till the time government spending happens. However, we think the pressure on the call rate is temporary and should subside once liquidity comes back into the system.? Sridhar believes the call rate is unlikely to cross the 5.50%-mark as banks may prefer to borrow, from the RBI, at the repo rate of 5.25%. In a bid to ensure enough liquidity in the banking system, mainly arising from payments to be made for 3G licences, the central bank had allowed banks to maintain a lower statutory liquidity ratio for banks, by 0.5%, for a short period till July 2, 2010. RBI now conducts two liquidity adjustment facilities (LAF) operations every day, allowing banks access funds from it. The central bank has also reduced the size of the treasury bill auction for June to Rs 15,000 crore from Rs 22,000 crore. Nevertheless, dealers believe that money could be somewhat tight because telecom companies have paid the government a sum of Rs 67,000 crore for 3G licences, most of which has been funded by banks. At the same time, advance tax outflows are expected to suck out funds close to Rs 30,000-40,000 from the system by June 15, 2010 .
Arun Kaul, executive director with Central Bank of India, observes that the money will come back with a lag. ?There is slight nervousness in the market on account of major outflows by way of 3G auctions and the upcoming advance tax outflows by mid-June. However, RBI is addressing these issues by reducing the size of treasury bill auction and introducing a special repo window,? he said.