Call rate hits six year high

The overnight call money rate today rose to a six-year high as banks struggled to cover cash requirements ahead of the first phase of increase in the cash reserve ratio, prompting the Reserve Bank of India (RBI) to mull opening a temporary refinance window for banks.

Call rate, the rate at which banks borrow money for a day, closed at 9.25 per cent, the highest since January 2001.

The RBI had last week announced a 50-basis-point increase in the cash reserve ratio (CRR) to 5.5 per cent, in equal phases of 25 basis points effective December 23 and January 6.

Banking sources said the RBI might extend a refinance window for infusing cash into the banking system to tackle tight liquidity conditions, but at a rate higher than the repo rate of 7.25 per cent.

The temporary measure is being contemplated till liquidity flows back into the banking system, as the government starts spending and interest payments on special deposit schemes (SDS) in the first week of January soothe the market.

Some of the call money trades were dealt at double-digit rates of 11-12 per cent. Outflows towards advance taxes clashed with the long break on account of Christmas and impounding of Rs 6,750 crore of cash towards meeting the raised CRR.

The RBI today infused Rs 23,080 crore of liquidity through repo auction. RBI infuses liquidity through the repo window and sucks it out via the reverse repo window.

Even though the repo window was available for borrowing funds at 7.25 per cent, some banks could not take advantage of it as their SLR portfolios were close to the minimum requirement of 25 per cent of deposits and they had to borrow at rates as high as 11-12 per cent.

This is one of the reasons why the RBI is considering a separate refinance window.

Banks also sought liquidity from the foreign exchange forward market by selling dollars and raising rupee funds for an extremely short period of 3-4 days till Tuesday.

These sell-buy swap deals, otherwise referred to as "cash tom" (cash for tomorrow), have been struck at 13-14 per cent . In effect, the rate for two-three days' money has far exceeded that for 10-year money at 7.59 per cent.

The high rates offered banks with high SLR portfolios an arbitrage opportunity by borrowing at 7.25 per cent from the repo window and lending in the market at high rates.

But most banks avoided reaping gains from the arbitrage opportunity for fear of having to book losses in marking to market securities towards the end of the third quarter. Mark to market is the valuation of securities at market prices.

The RBI had also called a meeting of banks to discuss the modalities for buyback of state loans which, banks felt, might take some time. The buyback of loans, as and when it happens, will infuse sufficient liquidity into the system.

The RBI, in informal discussions with banks, had said that the liquidity situation would improve in the first week of January, since the government was expected to start spending and as the current liquidity tightness was a frictional problem, banking sources said.