Liquidity dries up on CRR hikes

MONEY MARKET ROUND-UP

The liquidity position has started showing signs of strain since the Reserve bank of India could absorb only Rs 2400 crore from the market. The Usually surplus funds used to figured around Rs 30,000-40,000 crore last week. After two tranches of CRR hike and issuances of market stabilisation bonds, bills and dated securities under the government borrowing programme, the system is heading towards a deficit in liquidity, said a dealer.

The call rates at which banks lend and borrow from each other for their daily requirements shot up to a high of 7 per cent at close after hovering around 6.30-6.50 per cent. Since the mutual funds were wary of lending, the rates in the collateralised borrowing and lending market remained consistently high at 6.30-6.45 per cent.

G-sec: Lacking lustre

Tight liquidity led to lacklustre trading in government securities. Volumes in the government securities market fell to a low of Rs 4000 crore as trading interest was confined to few benchmark securities. The prices of securities fell by 15-20 paise, resulting in a 3-4 basis points rise in yields. One basis point is one hundredth of a basis point.

The yield on the benchmark ten-year paper closed at 7.83 per cent, while the long-term benchmark paper 8.33 per cent 2036 ended at 8.35 per cent. Following the fears of tightness in short-term liquidity, the cut-off yield on both 91 day and 182 day treasury bills inched up. The RBI announced a cut-off yield of 7.39 per cent for the 91 day t-bill and the 182 day t-bill was sold at 7.57 per cent as against 7.31 per cent and 7.44 per cent respectively in the previous auctions.

OIS and corporate bonds: IRFC bond issue

Indian Railway Finance Corporation (IRFC) has announced its plan to raise around Rs 2,000 crore from the corporate bond market through issuance of 10- and 20-year bonds. In the secondary market, benchmark 10-year bonds of State Bank of India was trading at 9.54/9.57 per cent as against 9.50 per cent last week. The rates of certificates of deposits (CDs) and commercial papers have inched up by 2-3 basis points following fears of tight liquidity.

Tight liquidity pushed rates in the overnight interest rate swap (OIS) market where the banks strike deals to protect the interest rate liabilities. Since the liquidity is tight, which, in turn, could push up the interest rates, banks struck deals wherein they paid fixed rate of interest and received in floating rate.

While there were no trades for three- to six-month segment, OIS rates for one month and above went up by 2-3 basis points. The OIS market is a derivatives product based on the underlying of the interest rate on the government securities.

Rupee: Free fall

The spot rupee continued to depreciate following a weak sentiment and dollar buying by oil companies. It opened at 42.20/21 and reached a low of 42.66 before closing a tad stronger at 42.43/44 to a dollar. The annualised premia for six-month and one-year forward dollars closed flat at 1.73 per cent and 1.60 per cent respectively.