Call rates soar to 15% on year-end liquidity pressure

The year-end rush for funds ahead of a holiday-shortened week pushed interest rates in the call money market to 15 per cent on Friday, 550 basis points higher than the previous close.

Such a level was last seen in November 2008. Also, banks borrowed to cover fortnightly reserve needs for four days, adding to the liquidity pressure.

According to norms, banks need to set aside 4.75 per cent of net demand and time liabilities as cash reserves with the Reserve Bank of India (RBI) on a fortnightly basis. They tend to cover most of the needs in the first week of the fortnight itself.

The money markets will remain shut on Monday for yearly closing and there are public holidays on Thursday and Friday.

“There are not many lenders in the money market, as it is the last working day of the financial year and banks need funds to keep aside as reserves with the central bank for four days,” said T S Srinivasan, general manager-treasury, Indian Overseas Bank. He added the pressure was temporary and call rates typically jumped on the last day of the financial year. These had inched up to 8.75 per cent on the last day of the previous financial year. “The high systemic liquidity deficit has made things worse this year,” said a bond dealer with a large public sector bank.

Today, banks borrowed a little over Rs 1.97 lakh crore from the RBI in twin repo auctions under the Liquidity Adjustment Facility (LAF). The central bank will conduct an additional LAF tomorrow, to make it easier for banks to manage liquidity on the financial year-end.

Economists Taimur Baig and Kaushik Das of Deutsche Bank said the liquidity tightness was also due to the government’s inability to expedite spending in March. As on March 16, the government cash balance was Rs 1.2 lakh crore.

“This leads us to conclude that the government probably would end the current fiscal year with a meaningful cash balance, which is likely to reduce the strain on liquidity from April,” they said in a report.

The liquidity deficit is more than twice RBI’s comfort level of one per cent of net demand and time liabilities. This is despite a reduction of 125 basis points in banks’ cash reserve ratio, in two tranches since January 2012. RBI also purchased government securities worth Rs 4,528 crore against Rs 10,000 crore notified under open market operations today.

The government will borrow Rs 18,000 crore in the first auction of the borrowing plan for 2012-13, scheduled next week.