Liquidity crunch lifts call rates to 16%

Banks’ rush to meet advance tax requirement tightens money market

The call money market rates hardened today tracking as a result of a further tightening of liquidity in the system. The NSE Overnight Mibor traded at 13.05 per cent, while the call ranged between 10 per cent and 16 per cent.

The overnight rates continued to rise and closed at a high of 16 per cent as banks stepped up borrowings to meet huge outflows towards advance tax payments, which are estimated to be around Rs 35,0000 crore.

The overnight collateralised borrowing and lending obligation (CBLO) rate was seen in the range of 5 per cent and 12 per cent. No amount was absorbed by The Reserve Bank of India (RBI) under the liquidity adjustment facility’s (LAF) reverse repo operation. The amount infused by RBI under the repo window was Rs 57,565 crore.

 

A tight cash supply also prevented a sharp rise in government bond prices, which rose as crude oil prices fell. All eyes will now be on the US Federal Reserve’s interest rate decision due later today.

Expectations are rife that a rate cut from the US Fed could trigger similar actions from other central banks and perhaps prompt RBI to hold rates at current levels when it reviews its monetary policy in October.

Gilt yields dip on credit turmoil concerns

The 10-year bonds completed their biggest two-day gain in almost six weeks on speculation that the credit crisis that is spreading from the US will deepen a global economic slump, pushing borrowing costs lower.

Benchmark yields dropped to the lowest in more than three months after mounting credit losses led to the collapse of Lehman Brothers Holdings, the sale of Merrill Lynch & Co and a debt-rating downgrade of American International Group. China reduced interest rates yesterday for the first time in six years after the economy slowed through four straight quarters.

Yields in the government securities (G-sec) market eased today in the backdrop of a continued softening of crude oil prices. The yield of the benchmark 10-year paper 8.24 per cent 2018 touched 8.01 per cent during trading hours. The yield then hardened, tracking tightening liquidity.

The benchmark 10-year paper closed at Rs 100.97 with the yield closing at 8.09 per cent. The turnover on the NDS Order Matching System was Rs 7,360 crore.

India’s 10-Year Bonds Complete Biggest 2-Day Gain in Six Weeks

“The worsening of the global financial crisis has given rise to a view that the US may cut rates again, putting pressure on central banks worldwide to follow suit,’’ said S Ananthanarayan, chief trader in Mumbai at Kotak Mahindra Bank. “Bonds have gained since yesterday as the China rate-cut helped this speculation.’’

Credit losses forced Lehman to file the biggest bankruptcy in history. Merrill, the world’s biggest brokerage firm, yesterday agreed to be sold at about $50 billion to Bank of America Corp Debt ratings of AIG, the biggest U.S. insurer, were downgraded yesterday by Standard & Poor’s and Moody’s Investors Service.

The People’s Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 per cent and lowered the reserve ratio at the nation’s smaller banks by 1 percentage point amid signs inflation is slowing.

The Reserve Bank of India has increased the benchmark interest rate three times this year starting June after leaving it unchanged for more than a year. China, which raised its benchmark six times in 2007, left the rate unchanged this year until yesterday’s reduction.

China’s annualised inflation rate declined to 4.9 percent in August, the least since June 2007, from a 12-year high of 8.7 percent in February. India’s wholesale price inflation was 12.10 percent in the week ended August 30, still near a 16-year high of 12.63 percent reached earlier that month.

The cost of benchmark Indian interest-rate swaps, or derivative contracts used to guard against rate fluctuations, declined. The five-year swap rate, a fixed payment made to receive floating rates, fell to 7.97 per cent from 8.45 per cent yesterday.