Liquidity Concern Fuels Call, Gilts Crash

Call rates went up sharply today as there were trades reported in the 7-10 per cent range while the government security prices crashed by 45-70 paise at the medium and long end of the market as liquidity came under strain because of advance tax outflow.

Call rates today opened around 7-7.25 per cent in the morning. The rates, however, went up during the day and most of the trades were done in the 7.75-8.25 per cent range. Dealers also said that some of the deals were done around 9.50-10 per cent.

Said a dealer with a private sector bank, "Because of the advance tax outflow there was liquidity shortage with the public sector banks who are generally the lenders in the overnight market. This caused overnights to rise sharply."

 

The Reserve Bank of India (RBI) today received no bid for its one-day repo and reverse repo auction. Dealers across the board said that the banks were reluctant to part with liquidity as the reporting fortnight approaches towards its end.

Government security prices that had staged recovery in the last two days fell sharply once again today tracking high call rates.

Said a dealer with a private sector bank, "The steep fall in gilts prices was mainly liquidity-driven with concern over international development relating to terrorist attack on US adding fuel to it."

The treasury head of a private sector bank said, "Though the rupee is not as volatile as it was few days back, still there is pressure on the Indian currency and this fact has its bearing on the government security market."

Call rates are likely to remain in the 7.25-8.25 per cent range as liquidity will remain strained because of advance tax outflow. Government security prices will track call rates and the development in the forex market.