Banks make a killing in call money market

Today, arbitrage gains were as high as 9.5%

Today, the last trading day of this financial year, banks booked arbitrage gains by borrowing from the repo window of the Reserve Bank of India (RBI)’s liquidity adjustment facility (LAF) and lending in the call money market. Arbitrage gains were as high as 9.5 per cent. Banks borrowed money at 7.50 per cent through the repo window and lent at 14-17 per cent. Today, banks borrowed Rs 1,74,745 crore through the LAF window. Five-day call rates closed at 17 per cent.

“Call rates rose, as banks had to maintain the capital adequacy requirement for the lending done by them. Because of this, there is a risk charge,” said S Srinivasaraghavan, executive vice-president and head (treasury), Dhanlaxmi Bank.

Dealers said the arbitrage opportunity was merely a one-day phenomenon. “This is a phenomenon seen in the last trading day of a financial year. The call rate would come down again next week,” said Siddharth Shah, vice-president, STCI Primary Dealer. He added LAF borrowings, too, would come down to Rs 1,30,000-1,40,000 crore next week. In the last month, daily average bank borrowings from RBI’s LAF window stood at about Rs 1 lakh crore, higher than the central bank’s comfort zone of +/- 1 per cent of banks’ net demand and time liabilities (Rs 65,000 crore).

On Tuesday, banks had borrowed Rs 1,63,065 crore from the LAF window. Today, RBI conducted additional LAF auctions to facilitate “smooth and non-disruptive conduct of banking operations”. The central bank would also conduct such auctions on Saturday and Sunday, keeping in mind banks’ requirement for cash, amid a tight liquidity scenario.

In April, government spending is expected to flow back into the system, after which LAF borrowings are expected to decline to RBI’s comfort zone. Though government spending is usually seen in the last week of a financial year, this time, the government had to meet the fiscal deficit target of 5.2 per cent of gross domestic product, owing to which the spending was postponed.