Outflows May Push Call Up

Call money rates are likely to remain in the 6.90-7.50 per cent range this week on the back of auction outflows, volatility in the forex market and advance tax outflows. Dealers said the liquidity condition might come under strain if the Reserve Bank of India (RBI) mops up liquidity.

"The domestic unit is slated to fall more against the dollar during the week. So the central bank may feel that speculative activities will set in. In that case, it can mop up liquidity, as it did last year, through open market operations, which may push up overnight rates," a dealer said.

Dealers expect the Rs 5,000-crore auction of the 11-year paper not to be fully subscribed since the liquidity position is slightly week after the recent open market sale.

Call rates were in the 7.25-7.50 per cent band on Saturday as the demand was high on the very first day of the new reporting fortnight. "Demand was high and there were very few lenders because of Monday's auction. This kept call rates high," a dealer with a private sector bank said. Dealers feel the demand would continue to remain high this week as well.

They expect that the comfortable liquidity position will come under severe strain during the week as there will be no major inflows to counter the outflows through various windows. "There will be auction outflows and possibly outflows through open market operations too. More outflows are expected on account of the advance tax," a dealer with a nationalised bank said. He, however, said the RBI may give some comfort to the market by lending money through reverse repo window. "Even then call rates should be very close to 7.50 per cent level as reverse repo rates are as high as 8.50 per cent," he said.

A section of dealers are also of the view that there may be announcement of another auction by the end of this week. "As the Centre has been talking about increasing the expenditure to boost the economy we will not be surprised if the RBI announces another auction by the end of this week," the treasury head of a private sector bank said. Hence call rates may even breach the 7.50 per cent mark, dealers feel.