Liquidity on a tight leash

MONEY MARKET ROUND-UP

The liquidity in the market continued to be tight, with the interbank call rates reaching an intraday high of 9.9 per cent. The call rates at which banks lend and borrow for their daily requirements remained high and closed at 9.8 per cent.

According to dealers, the banks are preparing to pay the higher cash reserve ratio (CRR) for the fortnight ending August 29 at 9 per cent as against the earlier 8.75 per cent. Liquidity also came under pressure following the dollar demand from the foreign banks as the foreign institutional investors (FIIs) sold in the equity markets.

“The market expects inflation, which touched 12.64 per cent for the week ended August 9, to go up further. It has therefore discounted monetary measures such as a CRR or repo rate hike. If the inflation rises, the call rates may touch 10 per cent and hover in the range of 10-10.25 per cent till the situation stabilises”, said a money market dealer.

 

The dealer clarified that the call rates may trade below 9 per cent if the status quo is maintained on the interest rate front. The RBI infused around Rs 30,000 crore into the financial market under the repo route.

The cash reserve ratio is the portion of total deposits garnered by banks over a fortnight and deposited with the RBI as a statutory obligation. Out of the total funds to be maintained, a bank needs to have atleast 70 per cent on any given day of the fortnight.

The overnight interest rate swap market saw the interest rates shooting up by 20-25 basis points. There was brisk trading across maturities (three month to five year OIS). Banks paid fixed rate of interest while receiving floating in OIS swaps, apprehending tightenening of liquidity and hardening of interest rates, mostly in the short-term period of three months to a year. While the interest rates from three month to one year have gone up by 250-30 basis points, the curve is inverted thereafter. Overnight interest rate (OIS) swap market is a derivative product based on the underlying of the interest rate on the government securities.

G-sec: Weak winds

The market remained bearish as the inflation is expected to go up further and trigger monetary action by the RBI. The inflation for the week ended August 9 hovered at 12.64 per cent as against the market expectation of 12.50-12.55 per cent. Prices of government papers in the medium and long end of the maturity fell by 40-50 paise as banks made room for fresh investments following the auction of papers on Friday. The RBI will auction 8.24 per cent 2027 for a notified amount of Rs 6000 crore.

The yield on the ten year benchmark paper closed higher at 9.21 per cent as against 9.14 per cent on Wednesday.

Forex: Rupee looks up

After opened at 43.73/75 to a dollar, the rupee appreciated to 43.50/52 on the back of dollar selling by exporters. According to dealers, the NDF market players unwinded the positions and booked profit.

On Wednesday, the NDF players also bought dollars (speculative positions) following aggressive dollar buying by the foreign banks on behalf of their custodian clients (foreign institutional investors), adding to the rupee depreciation.

“These positions were unwinded on Thursday as players booked profits”, said a dealer. In the NDF market, existing in Hongkong, Taiwan and Singapore since the 1990s, the forward dollars for any maturity are available at a premium to the Indian spot market values. And, unlike the Indian market, deals are settled on a net basis and not based on actual delivery.