Overnight money rates continued to stay high amid fears that the recent tightening by the Reserve Bank of India (RBI) was just the beginning of a second phase of monetary contraction. | |
| Call rate today closed at 8.25 per cent after touching a high of 8.40 per cent in early trades against 8.2 per cent last Friday. |
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| ICICI Securities, in its debt markets update, said "We believe the recent CRR hike is a statement of intent by RBI to embark on the second phase of monetary tightening. This phase is likely to result in overnight rates rising to the neutral or equilibrium zone, estimated as 7-8 per cent." |
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| Call money rates in normal times move in the range of the reverse repo rate (6.00 per cent) and repo rate (7.25 per cent). RBI sucks out liquidity from the banking system through the reverse repo auctions and injects liquidity via repo auctions. |
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| While banks were busy setting aside funds for the reporting Friday, the strain on liquidity was enhanced by outflows on account of advance tax payments and sale of state government bonds. |
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| JP Morgan Chase, in a note, said "strong capital inflows are posing a challenge to the central bank in conducting monetary policy. |
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| Indeed, even if the central bank is successful in managing inflationary expectations, excessive capital inflows could still prompt another increase in CRR to tighten liquidity. |
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| However, this will be the last resort and would follow an increase in the issuance of bills and bonds under the market stabilization scheme (MSS) to mop up excess domestic liquidity." |
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| K V Kamath, managing director and CEO of ICICI Bank, said CRR hike sucking out Rs 13,500 crore from the banking system is not a "significant" impact. The impact of the CRR hike is in terms of its signal for raising the interest rates not the amount per se, he added. |
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| "We have already increased interest rates. It is for the rest of the players (in the banking industry) to decide how to read the signal," Kamath said. |
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| The inching up of the call rate further widened the spread between the short and medium terms. The call rate is expensive by 64 basis points compared to the yield of 7.61 per cent on the benchmark ten-year paper. |
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| The 10-year yield was down from 7.64 per cent on Friday on expectations the government would cut its scheduled borrowing given the robust tax collections. |
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| The RBI infused Rs 5,000 crore into the banking system through the repo auction at 7.25 per cent. |
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