The overnight call rate jumped to a three-year high of 9.6% on Tuesday even as bonds rallied smartly, sending the yield on the benchmark to a four-month low of 8.28%. In a study of contrasts, the stock market lost further ground but the rupee remained firm at 52.885 to the dollar, even as Reserve Bank of India deputy governor Subir Gokarn said the central bank has lined up more measures if the rupee drops further.
The benchmark Sensex closed the session at a 28-month low of 15,175.08 points, a fall of 1.3%, as foreign institutional investors (FIIs) continued to take risk off the table.
With close to R70,000 crore moving into the government?s kitty on account of advance tax payments, money markets were tight on Tuesday, compelling banks to access the RBI?s special window for funds to the tune of R1.64 lakh crore, an amount similar to that borrowed on Monday. In a bid to ease the pressure on the money markets, the central bank announced open market operations (OMO) for an amount of R10,000 crore. The rally in the bond market, dealers said, was triggered by expectations that the central bank might start cutting interest rates to boost flagging growth.
Gokarn said the shortage of liquidity reflected a temporary mismatch in the system. ?We will wait and see but the immediate pressure on liquidity has arisen purely on account of advance tax payments and the situation should normalise soon,? he said on the sidelines of a conference.
While banks are concerned about the liquidity shortage, they believe the situation would improve soon. Said Parthasarathi Mukherjee, president (treasury), Axis Bank, ?Our sense is that the pressure would ease by the weekend.?
Interestingly the call rate rose above the 9.5% rate at which banks can borrow from the central bank through the marginal standing facility (MSF). ?It?s up to the banks to choose how they want to borrow. The MSF hasn?t been around long enough for it to have become a stigma for banks to access it,? Gokarn said.
Meanwhile, although the rupee breached the 53 mark against the dollar in intra-day trades, falling to 53.10, it recovered at close to Rs 52.885. The euro was trading at 1.3070 levels to the dollar in mid-day trades. ?The currency has been relatively stable over the last few days which means the measures taken by us are clearly working,? Gokarn said adding that the RBI had lined up a few more measures to tackle the weakness in the currency and would use them as the need arose.
?We may have seen the last vestiges of demand going through right now and, moreover, the RBI certainly has the wherewithal to stem the slide of the currency in the near term,? observed Ananth Narayan G, head, treasury, Standard Chartered Bank. ?Nobody should underestimate the RBI?s ability to contain the fall of the rupee.?
Volumes in the forex market have dropped off significantly after the central bank disallowed exporters from cancelling and re-booking forward contracts last Thursday. The RBI also pruned the overnight dollar positions of banks in a bid to curb speculation and reduce volatility. The deputy governor said the RBI was sensitive to concerns of volatility that may result from smaller volumes. Last Friday the central bank freed interest rates on NRE or non-resident (external) rupee deposits and NRO or ordinary non-resident accounts. ?The idea is to induce flows into the market,? Gokarn said.
The rupee is expected to get a boost from inflows of FIIs, who have been given fresh allocations for gilts and corporate bonds after the government recently upped the ceiling on such investments by a collective $10 billion. Some investors are understood to have started utilising their quotas. However, global fund managers remain bearish on the Indian equity markets with FIIs having sold around $500 million worth of stocks so far this year after having bought $29.4 billion worth of equities in 2010. In dollar terms the Sensex has lost 37% since January this year with the rupee having depreciated close to 16.5%.
