Intra-day call rate touches 9-year high

Hits 60% before closing at 17% as banks see outflows of Rs 40K cr towards tax payments.

Money market rates today touched nine-year highs as the liquidity squeeze in the banking system worsened. The overnight call money rate touched 60 per cent intra-day and some banks, particularly foreign and private banks, used dollars to raise rupee resources for a day at a record rate of 105 per cent, dealers said.

Banks chased rupee resources as they saw outflows of around Rs 40,000 crore towards tax payments. Government bond auctions further squeezed liquidity. A liquidity crunch in 1998 had seen the call rate touch 100 per cent.

The swapping of dollars for a day, by banks which had exhausted their borrowing limits in the call money market, helped the rupee to appreciate 0.7 per cent and close at a 19-month high of Rs 43.74 per dollar. Dollar swapping involves exchanging dollars for rupees.

Dealers said banks were raising rupees even after closure of the call money market for the day. The call rate is the rate at which banks lend to other banks for a day.

The inter-bank notice money market (borrowings up to 14 days) and term money market (up to 1 year) too witnessed high volatility, with rates at high levels. The term money market rates for most part of last week were at a high of around 12 per cent after nearly six years.

The liquidity squeeze was felt even as the RBI infused Rs 35,000 crore into the banking system through its repo (repurchase) window at the fixed rate of 7.50 per cent.

The money market rates hit multi-year highs as most banks did not have excess investments in government securities to borrow funds from the RBI. The RBI infuses liquidity into the system against repurchase of government securities for a day.

The 100-basis-point hike in the cash reserve ratio (CRR) since December 2006 has drained about Rs 28,000 crore from the banking system which, coupled with high credit demand, though slowing, has strained liquidity in the banking system.

The incremental credit-deposit ratio is still at a high of around 88 per cent, though lower than the over 100 per cent last year. The incremental increase in deposits in the first two months of 2007 was 30 per cent of the accretion since April 2006.

The increase in banks' outstanding credit since April 2006 was Rs 3,39,326 crore, against accretion to deposits of Rs 3,83,805 crore.

Banks are required to invest 25 per cent of their deposits in government bonds for statutory liquidity purposes and another 6 per cent as cash balances with the RBI.