Funds Glut Set To Keep Call Low

Call money rates are likely to remain in the range of 6.80 per cent to 7.10 per cent this week on the back of limited demand. As many dealers have already covered their positions, there is likely to be an excess supply of funds in the market.

A dealer said: "Demand in the overnight call money market is typically low in the second week of the fortnight. There will be no exception this week as most banks and primary dealers have already covered their positions for the fortnight. For the most part of the week, call rates should be below the refinance rate of seven per cent."

 

Call rates were in the range of 6.75 per cent to 6.95 per cent on Saturday amidst comfortable liquidity and very thin demand. A dealer with a private sector bank said: "Banks -- both private and public -- are flush with deposit inflows and hence there was very little demand in the call market. This kept interest rates low." Dealers feel the same phenomenon will be replicated this week as well.

Dealers are not expecting any auction during the week due to the dividend received by the Central government from the Reserve Bank of India (RBI) and, hence, there will be no pressure on liquidity on that account either. A dealer with a nationalised bank said: "The ways and means advances to the central government is already below Rs 10,000 crore (as on August 10). Moreover, due to the dividend paid to the Central government, there will be no need for the government to borrow fresh loans from the market." The RBI has already completed more than 65 per cent of the gross government borrowing programme of Rs 1,19,770 crore.

The liquidity condition will get a boost from the Rs 8,000-crore inflow on account of the redemption of the 11.75 per cent 2001 government paper on August 25. Dealers said, in the absence of any outflow, the above inflow may push call rates very close to the repo rate of 6.50 per cent next Saturday.

"The liquidity glut may put pressure on the RBI to conduct an auction in the last week of the month," a dealer said. However, he expected the auction to be of a small amount (around Rs 3,000-5,000 crore), with little impact on call rates.