Liquidity crunch fears keep banks from lending

MONEY MARKET ROUND-UP

Liquidity: Stays surplus
Banks were cautious in lending today even as liquidity was in surplus as they geared up for outflows in the market.

Call rates, at which banks lend and borrow for their daily fund requirement, hovered around 5.5-6 per cent. However, RBI mopped up around Rs 4,650 crore from the market today compared with Rs 12,000 crore on Monday.

Rates in the collateralised lending and borrowing (CLBO) market also remained above 6 per cent since mutual funds feared redemption from banks to manage liquidity in coming days.

G-sec: High volumes
Volumes in the government securities market were at Rs 11,000 crore since most of the banks bought bonds in the beginning of the trading session and then booked profits. Consequently, the yield fell first and rose during the latter half of the trading session.

According to dealers, most of the banks engaged in trading and floating portfolio in preparation for the government's security auction to be held on Friday. The yield on the ten-year benchmark paper first fell to 7.64 per cent, but closed during the day at 7.67 per cent.

Prices of government securities moved up by 30-40 paise across maturities. However, yileds in the shorter end of the yield curve rose marginally after falling since the outlook on liquidity was bearish.

The long-term paper with the maturity of 30 years and above moved up by 72-75 paise.

Tracking firm yields in the short term, the market expects the cut-off yield in the auction of 91- and 182-day treasury bills to move up by 4-5 basis points compared with the last week's yield. The 91-day T-bill fetched a cut-off yiled of 7.02 per cent last week.

OIS and corporate bonds: Yields rise
The concern on liquidity tightening towards the end of the week moved yields up in the overnight interest rate swap market (OIS).

While other maturities ranging from one year to five years witnessed firming up of yields by 2-3 basis points, in the three-month maturity, OIS yields moved up from 7.05 per cent to 7.15 per cent.

The likelihood of liquidity tightening and consequent firmness in interest rates led banks to strike OIS deals wherein they preferred receiving in floating rate of interest and paid in the fixed rate of interest.

The OIS market is a derivatives product based on the underlying of the interest rate on government securities.

There was brisk activity in the corporate bond market. The easing of yields in the three months to one year maturity that followed easy liquidity last week continued.

Oriental Bank of Commerce and State Bank of India associates raised funds through one-year certificate of deposits (CDs) at 8.60-8.70 per cent. CDs of private bonds were raised at 8.75-8.8 per cent, while foreign banks like ABN Amro and Standard Chartered raised funds at 8.88-8.90 per cent.

Andhra Bank raised 10-year funds at 9.15 per cent. The triple-A-rated bond of LIC Housing Finance mopped up funds at 8.94 per cent for three years and at 9.14 per cent for 10 years.

Rupee: Ends flat
The spot rupee reached a fresh nine-year high of 39.21 after opening for the day at 39.22-23 to a dollar. This followed heavy selling of dollars by foreign banks on behalf of their FII clients, otherwise referred to as portfolio investments.

Thereafter, there was massive intervention of RBI, which bought dollars in the spot market. There were no swap deals by RBI to book the dollars at a future date.

Therefore, the annualised premia for the six-month and one-year forward dollars came down and closed at 1.44 per cent and 1.22 per cent as against 1.50 per cent and 1.20 per cent on Monday.

Global markets: Yen falls
The yen depreciated to close at $109.51 since global funds bought dollars and sold the yen. The euro and the pound closed at $1.4714 and $1.9760.