Calls, Repo Rates Harden On Mop-Up

Interest rates in the short and medium term hardened yesterday following a substantial decrease in liquidity in the banking system on account of government borrowing.

The Reserve Bank of India (RBI) yesterday accepted the entire Rs 5,381.14 crore of 13.05 per cent 10-year state government paper, which was oversubscribed by over two times.

The interest rates in the inter-bank call money market touched 10 per cent on account of this outflow.

Consequently, the rates quoted by the banks at yesterdays repos auction were correspondingly higher and the RBI rejected all the six bids worth Rs 4,650 crore.

In the earlier repo auction held on Friday last, the Reserve Bank had fixed the cut-off rate at 2.4 per cent.

In spite of the increase in the call rates, the auction of 91-day treasury bills sailed through.

With a further mop-up of Rs 3,000 crore due on May 9 on account of the auction of a five-year paper announced by the RBI yesterday, money market dealers say that the euphoria over liquidity in the banking system could be short lived.

The market fears that government borrowing will again crowd out corporates. The rise in rates is expected to nullify all the steps taken by the RBI to bring about an easy money regime to spur growth.

Earlier, the government had mopped up Rs 3,000 crore by issuing a 10-year paper and Rs 4,901 crore by issuing 364-day treasury bills. All these factors have substantially reduced the excess liquidity in the banking system.

With the calls moving up and signs of liquidity tightening, there has been a sea change in secondary market yields of dated paper.

The price of the 13.80 per cent 2002 fell to Rs 105.10, indicating a 12.61/76 per cent yield. The recently auctioned 13.05 per cent 2007 was traded at a yield of 12.90 to 12.93 per cent.

If secondary market yields are used as a thumb rule then the market is expecting at least 12.50 per cent at the auction of the five-year paper.