Rising yields amid funds crunch

MONEY MARKET ROUND-UP

Two tranches of cash reserve ratio (CRR) hike and couple of auctions of government securities and treasury bills for mopping up excess liquidity finally resulted in tightening of the money situation. Moroever, the market is preparing for the third tranche which comes into effect from May 24.

Apprehending liquidity tightness in the coming week, most of the banks prepared for CRR maintenance this week itself. While the demand for funds was quite high, no one was willing to lend for four days including the weekend, said a dealer. Thus the call rates at which the banks lend and borrow from other banks went up to a high of 7.75 per cent.

 

The RBI had raised the CRR on April 17 in two tranches of 25 basis points each and a third time on April 29 by another 25 basis points. The CRR has gone up to a high of 8.25 per cent. Cash reserve ratio is a statutory requirement for banks to maintain a portion of their deposits mobilised over a fortnight with the central bank.

The collateralised borrowing and lending obligation market, where non-banking entities lend and borrow money, moved up to 7.40 per cent.

G-sec: Selling abounds

Tight liquidity and the rush to arrange funds for reporting fortnight next week, led to selling of securities across maturities. Yields on government securities went up by 3-4 basis points across maturities.

The yield on the benchmark 10-year paper went up from 7.83 per cent to 7.87 per cent. Volumes in the government securities market hovered around Rs 4260 crore.

However, there was not much selling in treasury bills. Most banks prefer to remain invested in t-bills during times of uncertainty as such investments do not require provisioning for market losses.

OIS: Increasing yields

The yields for the corporate bonds went up in both the short- term and long-term papers, thanks to the tightening liquidity.

In the overnight interest rate swap market, yields went up by 5-10 basis points across maturities. The tight money situation pushed the rates in the overnight interest rate swap market, where banks strike deals to protect the interest rate liabilities. Given the liquidity pressures, banks struck deals wherein they paid fixed rates of interest and received in floating rates.

Overnight interest rate swap market is a derivative product based on the underlying of the interest rate on the government securities.