High Repo Rates Distort Yield Curve

It is close to a month now that short term interest rates in money market are northward bound while in the forex market, near-term forward premia on dollars are higher than six-month forward premium. The repo rates and short-term treasury bill rates have gone up substantially while the overnight call money rates which at one point of time touched 24 per cent are now hovering around 14-15 per cent. The trigger point for this inverted yield curve was the volatile forex market which pushed the rupee to a new intra-day low of 46.07 early this month.

The spot rupee seems to be stabilising but the Reserve Bank of India (RBI) is yet to show its eagerness to lower the repo rates, which are still at around 14.5-15 per cent for one-day and three-day money. According to most interbank dealers, the repo rates will be slashed only after the forex market shows stability for a period of time.