The inter-bank call rate shot up to 8 per cent on Friday following a shortage of funds in the market on account of outflows of around Rs 34,000 crore (Rs 340 billion) this week.
After a gap of one month, the Reserve Bank of India on Friday pumped in around Rs 1,200 crore (Rs 12 billion) into the market, which helped call rates end lower at 7 per cent.
Call is the rate at which banks lend to other banks. According to bank dealers, this is a temporary phenomenon since banks were playing safe with liquidity at the end of the month, which incidentally marks the end of the second quarter of the financial year. Moreover, the lenders did not want to place funds with the RBI for three days following the weekend.
Liquidity was already under strain following advance tax outflows of around Rs 30,000 crore (Rs 300 billion), which began this week. This coincided with outflows of Rs 1,000 crore (Rs 10 billion) towards the treasury bill auction and Rs 3,000 crore (Rs 30 billion) towards state government loans on Friday. Therefore, some banks had to borrow at higher rates from the market.
Earlier this week, the situation was a bit different as banks parked their surplus with the RBI even after advance tax outflows to meet the cash reserve ratio requirement.
CRR is the portion of funds parked with the RBI as a proportion of deposits mobilised by banks.
Meanwhile, the RBI continued to intervene heavily in the foreign exchange market to curtail the rupee appreciation. "This was evident from the fact that even if there were foreign exchange inflows, the spot rupee hovered in a range of 39.88-39.90 and reached an intra-day low of 40 during the day," said a market source.
According to dealers, the RBI is expected to have bought more than $2 billion from the market. The spot rupee opened flat at 39.88/89 and closed at 39.90 to a dollar.
The RBI intervention, dealers say, is expected to continue on a large scale even next week as the dollars mopped up through intervention are likely to be absorbed by the RBI through bond issues next week.
Moreover, banks will have to face month-end demands along with Rs 10,000-crore (Rs 100 billion) outflows towards the auction of dated securities under the market stabilisation scheme next week. Therefore, the call rate may remain tight till advance tax outflows start coming back into the system through government expenditure.
The government securities market, on the other hand, was range-bound owing to lacklustre trading. The yield in the 10-year benchmark security closed flat at 7.84 per cent. The prices of most government papers remained flat during the day.
The Side Effects
- Govt securities market was range-bound owing to lacklustre trading
- Bank dealers say this is a temporary phenomenon since banks were playing safe
- The Reserve Bank of India's intervention is expected to continue on a large scale even next week
- Earlier this week, the situation was different as banks parked their surplus with the RBI
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