The overnight call rates shot up and closed around 6.75 per cent on Wednesday following a sudden tightening of liquidity in the money market. The call rates were reeling below 1 per cent till the last week. | |
| The call rate is the interest charged by a lending bank to a borrowing bank in the inter-bank market. |
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| "The liquidity constraint is more of a sentiment issue since it is not going to linger beyond a few days. The liquidity will start flowing in with the government beginning to spend the advance taxes received," said Partha Mukherjee, head, treasury, UTI Bank. |
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| The transfer of the Reserve Bank of India (RBI) stake in State Bank of India to the government will not affect the market as it will be cash neutral after the RBI pays the money back to the government as dividend. |
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| According to dealers, the two tranches of treasury bill auctions for a higher amount of Rs 11,000 crore have affected the market sentiment. |
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| Even if there is enough liquidity in the system, banks are being cautious since they feel it could take a longer time for the money flowing out of the system to come back. |
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| This was not the case a few weeks ago, when the government raised around Rs 22,000 crore through auction of dated securities and treasury bills. |
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| Even after this outflow, call rates remained comfortable since the liquidity was aided by the government expenditure and continuous purchase of dollars by the RBI from the foreign exchange market infused equivalent rupee liquidity. |
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| On Wednesday, the RBI received only two bids worth Rs 10 crore at its reverse repo window, the mechanism for absorbing excess liquidity from the system. |
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| This is in stark contrast to Tuesday, when it received bids worth Rs 60,000 crore. Following a surplus liquidity in the system, the call rate had started easing since the middle of May and was reeling below 1 per cent till the last week. |
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| While the government expenditure remains uncertain, the market earlier was confident of an intervention of the RBI in the foreign exchange market, resulting in excess rupee liquidity in the system. |
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| However, dealers said the chances of the RBI intervention had come down with inflation falling below 5 per cent. |
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| The tightness in liquidity also pushed up the premia on the forward dollars in the system. With rising cost of the rupee funds, the annualised premia for six months and one year forward dollars closed at 3.32 per cent and 3.04 per cent as against 2.92 per cent and 2.78 per cent respectively on Tuesday. |
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