Action evokes small rise in short-term rates; liquidity tight till month end

Reserve Bank of India’s rate increase action had a limited impact on the money market and short-term paper, while bank borrowings from the central bank’s liquidity window shot past the Rs 50,000-crore mark.

Bankers said a 25-basis point rise in the repo rate, at which RBI lends to banks, was already factored in. The extent of increase will taper as the maturity period of paper elongates. Money of 15-30 days would perhaps see a rise of about 15 basis points and one of 10 years about five bps.

Ashish Ghiya, managing director with Derivium Securities which syndicates corporate and bank paper, also said a lot of the RBI rate hike action had been factored in. Their increase in the rates for short term paper was 5-10 basis points.

The weighted average of call rates was 5.89 per cent as against 5.78 per cent yesterday. The rates peaked to 6.1 per cent, crossing RBI’s revised repo rate of 6.0 per cent, according to data provided by Clearing Corporation of India Ltd.

J. Moses Harding, head–global markets group, IndusInd Bank, said this aggressive stance despite maintaining tight liquidity reflects a hawkish tone of the regulator. The intention is also to maintain the shorter-end yield curve at elevated levels in the event of a shift of operating rate from repo to reverse repo.

M Sarraf, head of treasury with Dhanlaxmi Bank, said the stance of RBI policy is still hawkish as inflation rates remain high. Hence, the interest rate on the short-term instrument will keeping rising.

The rise in rates has been also partly due to pressure on resources in the system. Reflecting tight conditions, banks on Thursday borrowed Rs 51,850 crore from the RBI liquidity window, more than three times the borrowing yesterday.

The system was resource-surplus till the middle of last week. Banks were parking funds with RBI. They turned net borrowers from September 9. This week, about Rs 40,000 crore would move out of the system due to the second tranche of advance payment of corporate tax.

Borrowings at the Liquidity Adjustment Facility window would remain elevated until the government spends money out of advance tax collections from the second quarter.

Ghiya of Derivium Securities said liquidity in the system will remain in deficit mode till this month end. Government spending, which brings resources into the system, has been higher than normal. This may turn liquidity positive on some days in October, when credit demand surges.