Banks that had borrowed aggressively from the Reserve Bank of India on the first two days of the week had to then park their excess funds at a lower rate.
Banks borrow funds from the repo window of the central bank at eight per cent. On Tuesday, they'd together borrowed Rs 48,365 crore from the Liquidity Adjustment Facility (LAF) in the morning, only to realise by the evening that some of the funds were in excess and they had to lend it to the call money market at six to seven per cent, incurring a loss.
According to dealers, due to this misjudgment, resulting in excess supply, Collaterised Borrowing and Lending Obligation (CBLO) rates dropped to six per cent on Tuesday as compared to more than seven per cent last Friday. The weighted average rate for CBLO was 7.64 per cent and 7.79 per cent on Tuesday and Monday, respectively, as compared to 8.12 per cent last Friday.
"Banks tend to cover their product needs during the beginning of a reporting fortnight. This being a start of a new fortnight, banks borrowed aggressively on Monday and Tuesday," said a treasury official of a foreign bank.
After incurring a loss on consecutive days, banks became cautious today. They borrowed only Rs 14,660 crore as compared to Rs 48,365 crore and Rs 97,915 crore in each of the past two days. Banks' borrowing from the repo window fell to a nine-month low, the earlier occasion being their borrowing of Rs 8,000 crore on October 7, 2011.
Dealers said liquidity in the market had improved significantly this week, with the advance tax fund coming in and banks availing refinance for export credit. RBI had raised the rupee export credit refinance limit to 50 per cent of the dues, from 15 per cent, which released an additional Rs 30,000 crore at the prevailing repo rate of eight per cent.
There were also liquidity inflows in the form of bond redemptions of about Rs 7,500 crore this week.
The liquidity situation has improved significantly in July as compared to June, when banks' average daily borrowing was Rs 90,000 crore, higher than the central bank's comfort zone of plus or minus one per cent of net demand and time liabilities, which is Rs 60,000-65,000 crore.