Banks rush to make most of high call rates

MUMBAI: Banks were trying to make the most of the rise in short term money market rates on Wednesday. Just as interest rates in the inter-bank call market and the market for collateralised operations crossed the 6% mark, banks rushed to park funds in these markets, leaving the central bank with bare minimal cash flows to absorb at the reverse repo window.

While the call money market saw volumes of around Rs 12,301 crore, the market for collateralised borrowing and lending obligations (CBLO) had volumes rising to Rs 27,580 crore. The Reserve Bank of India did not receive any bids in the first session of liquidity adjustment, but in the afternoon session, banks parked only Rs 10 crore with the central bank.

Call money rates opened the day at 4-4.5% levels, but ended much higher at 6.75-7% levels. Similarly, rates in the CBLO market opened at 5% levels, but rose to 7.20% levels later in the day. The central bank offers banks a rate of 6%, when they park funds through reverse repo operations.

For the past few weeks, call rates and rates in the CBLO market had been trading at below 1% levels. This situation had caused banks to look for other avenues to park their cash, and most of them tried to park funds at the RBI’s reverse repo window. Again, this route also had limitations as the central bank would absorb only flows worth Rs 3,000 crore on a given day.

The rising interest rates and shrinking liquidity took a toll on the prices of government bonds. The yield on the benchmark paper, the 7.49% bond maturing in 2017, ended the day at 8.23%, up from the previous close of 8.2%.

The central bank conducted an auction of treasury bills worth Rs 6,000 crore, in a bid to suck out the excess cash flows from the system. The RBI issued 91-day t-bills worth Rs 3,500 crore and set a cut-off yield of 7.39%, higher than the previous cut-off of 7.14%. The central bank set a cut-off yield of 7.66% on the 182-day t-bills, issued worth Rs 2,500 crore. At a previous occasion, the RBI had set a cut-off yield of 7.81%.

The rupee, on Wednesday, ended at 40.97/98 levels, weaker than the previous close of 40.90/91 levels per dollar. Treasury managers attributed the weaker rupee to falling appetite of global investors for risky assets. Oil companies were also seen purchasing the dollar. However, exporters who sold dollars when the rupee breached the 41-mark, helped curb the local currency from falling further.

Meanwhile, a volatile rupee has caused the yields on forward contracts to rise substantially. The yield on the one-month contract rose to 3.9% from the previous close of 1.96%, while the six-month premia closed at 3.34% (2.97%). Similarly, the yield on the one-year contract ended at 3.03%, as against Tuesday’s close of 2.81%.