Calls May Firm Up To 6 Per Cent

MONEY MARKET

Rates in the inter-bank call money market are seen to rule in the region of 5 per cent to 6 per cent this week. This prognosis takes into account the fact that the Reserve Bank of India (RBI) announced a three-day repo auction to be held today.

This is to be followed by more repos auctions in the second half of the month. As a result, the total withdrawal of funds from the banking system could be to the extent of Rs 300 to Rs 400 crore.

The outflow on account of the repos will be supplemented with the outgos towards the state government loan coming up on January 20. The state loan is expected to soak Rs 1,600 crore.

On Saturday, rates in the call market opened at 4 per cent but moved down to 3 per cent during the course of the day. The securities' market continued to be dull with thin activity being reported. During the past week, trading in the government securities' market remained subdued. This, despite the fact that rates in the call market ruled low. Transactions in securities were on the lower side as banks had already bought a large quantum of gilts in the previous week. The number of sellers in the market were seen to outstrip the buyers.

During the preceding week, the bulk of the lending continued to be performed by nationalised banks and financial institutions, while borrowing was being carried out by the private sector and foreign banks. Dealers noted, with an element of surprise, the fact that there was a 5 to 10 paise decline in the prices of gilts even as the call rates remained low. Sentiment in the market was low due to apprehensions of another batch of central government borrowing and the forthcoming state government loan.

The state government loan, which is coming up on January 20, could see an oversubscription. A few nationalised banks and provident funds are expected to opt for the paper. A yield of 13.75 per cent for a ten-year paper is a good deal. Provident funds, too, could go for this issue as they are, by nature, inclined to invest in the long-dated papers. As of now, provident funds are flushed with funds. This is so because they earn interest on their special deposit schemes during the month of January. Therefore, the probability that they will invest in the state loan issue appears to be even higher.

Dealers said the RBI has already begun contacting banks to get a feedback on the amount of funds they are likely to put into the state government loan. Bankers said the cut-off rate for the repos is likely to be set at 4 per cent.

Given this feeling, it is expected that the rate will act as a benchmark for the call money rates. Calls may, therefore, rule marginally higher, between 5 and 6 per cent.