Call rates seen up on liquidity woes

Rates in the overnight call money market are expected to inch up, as banks would borrow to meet the reserve needs at the start of new reporting fortnight. Banks’ borrowing from the repo window of the Reserve Bank of India (RBI) is also expected to increase.

Typically, banks tend to cover fortnightly reserve needs in the first week itself. On Friday, call rates traded around 8.6 per cent.

Moses Harding, head of research at IndusInd Bank, expected call rates to trade in the range of 9-9.25 per cent this week. He said the situation might worsen in the second fortnight of March as well on the back of combined pressure of advance tax outflows and banks’ reserve needs.

Lenders have been borrowing around Rs 1.2 lakh crore daily, despite cut in cash reserve ratio (CRR) by the central bank last month. Liquidity deficit is twice as high from the RBI’s comfort zone of one per cent of net demand and time liabilities. “The risk is now for further squeeze to push the draw down close to Rs 2 lakh crore by the second fortnight of March,” said Harding.

Even as expectation of another round of reduction in the CRR on March 15 is gaining ground, traders said the measure would not be applicable until March 23, after which the new reporting fortnight begins.

Rates in the short-term money market have also hardened over the month, as banks are raising funds through certificates of deposit (CDs). The rates for CDs maturing in March-April have shot to 10.5 per cent levels. “Demand for CDs is high from banks to meet year-end targets,” said a bond dealer from a public sector bank. The dealer added some maturities are also being rolled over but at higher rates.

Last week, RBI infused Rs 11,839 crore via purchase of government securities under Open Market Operations (OMOs). However, government raised Rs 12,000 crore via sale of dated securities in the same week. According to the revised issuance calendar, RBI is slated to auction Rs 12,000 crore in March 2012. This is the last scheduled auction in the calendar for the current financial year.

On Friday, yields on the ten-year benchmark government bond closed at 8.22 per cent. Yields may inch up in absence of another round of OMO announcement this week.