Rise expected in short-term rates on liquidity strain

The interest rates on short-term money market instruments are expected to move up, as liquidity may come under stress due to the increased government borrowing through Ways and Means Advances (WMA).

The call money rate is expected to open higher than its close of 6.95 per cent last week. The Collateralised Borrowing and Lending Obligation is seen trading at 6.65-6.8 per cent. It settled at 6.65 per cent last week, according to the Clearing Corporation of India.

Government borrowing through WMA increased sharply last week, with the Reserve Bank of India (RBI) issuing cash management bills worth Rs 20,000 crore in three auctions. According to RBI, the government can borrow up to Rs 1.05 lakh crore through WMA in the first half of the current financial year. This is significantly higher than the limit of Rs 30,000 crore set in the corresponding period of the last financial year. “The issuances of cash management bills has led to uncertainty in the short term and the limits are also higher than last year. This may have an impact on the short-term liquidity,” said a bond dealer with a domestic brokerage.

According to the latest data, the government’s loans and advances from RBI increased to Rs 50,607 crore in the week ended April 15 from Rs 37,038 crore a week before. Adding to the short-term liquidity woes are more planned auctions of treasury bills. The government will auction Rs 7,000 crore of 91-day T-bills and Rs 3,000 crore of 182-day T-bills on Wednesday, as against a scheduled supply of Rs 4,000 crore and Rs 2,000 crore, respectively.

Overnight indexed swap rates are also seen moving up on liquidity concerns.