The Hindu Business Line : Call rates spurt on tight liquidity

`There was sheer panic in the market and nationalised banks, which are usually lenders, turned borrowers. Banks have been selling excess securities held under the SLR to garner funds.'

Mumbai , Dec. 22

Spurred on by a liquidity squeeze, the inter-bank call rate (the rate at which banks borrow from each other) soared to 11 per cent before closing at 9-9.25 per cent, up from Thursday's 8.2-8.3 per cent.

Driven by the long weekend and the hike in cash reserve ratio from 5 per cent to 5.25 per cent (effective Saturday), banks were scrambling to cover their positions.

Reflecting the shortage of cash, bank borrowings from the RBI on Friday stood at Rs 23,080 crore. In the first four-day RBI repo auction under the liquidity adjustment facility, the central bank received 23 bids and lent Rs 11,765 crore to banks and in the second auction it accepted 33 bids for Rs 11,315 crore.

The first and second four-day reverse repo auctions saw one bid for Rs 65 crore and six bids for Rs 2,735 crore, respectively. The CBLO market saw 402 trades aggregating to Rs 15,571.90 crore in the 1 per cent-9.95 per cent range.

Advance tax mop-up

To add to the liquidity woes, advance tax collections of the Central Government, which have been pegged at around Rs 30,000-Rs 35,000 crore, sucked out cash from the system. The first phase hike in CRR, effective December 23, will drain out Rs 6,750 crore from the system.

"There was sheer panic in the market and nationalised banks, which are usually lenders, turned borrowers today. Banks have been selling excess securities held under the Statutory Liquidity Ratio to garner funds, with the SLR dropping to 27 per cent against the statutory norm of 25 per cent. This leaves very little margin for players to borrow at 7.25 per cent from RBI under repo facility (banks have to place securities with RBI for cash) and sell the same in the inter-bank call market at around 9.25 per cent," said a dealer at a private bank.

In line with RBI's stance

"This is in line with the RBI's stance on slowing credit growth. Now, banks will be careful in lending as there will be a resources crunch," said a senior treasury official.

Market participants say deposit rates are on the rise. In the past two days, the interest rates on one-year bulk or non-retail deposits have jumped to 9.5 per cent from 8 per cent.

Bankers say that with the cost of funds going up substantially, a mark-up in lending rates could follow. ICICI Bank and HDFC Bank have already raised their Prime Lending Rate while SBI, Union Bank of India and Bank of India have raised their domestic term deposit rates.

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