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Liquidity fears haunt markets
June, 12th 2008

The usual lenders, the public sector banks, were absent in the money market. According to dealers, most banks are flush with funds, but are wary of lending on fears of liquidity tightness in the coming weeks. Liquidity will tighten primarily on account of outflows towards advance taxes and banks preparing to pay CRR, which stands higher at 8.25 per cent after three rounds of hikes since April 17 this year.

The RBI infused liquidity to the tune of around Rs 5695 crore. While the bid size is small, the rates in the call market reached an intraday high of 8.25 per cent before closing at 7.75 per cent.

Dealers remarked that going by the increase in the interbank rates, the RBI would have infused much more than just Rs 5695 crore. This shows that banks are flush with funds, but do not want to lend to others. Repo is the rate at which the RBI infuses funds, while it absorbs funds through reverse repo.

On Wednesday, after market hours, the RBI raised the repo rate from 7.75 per cent to 8 per cent. Banks will have to pay 25 basis point more for borrowing from the RBI, which they may pass to the customers by raising the borrowing rates. Consequently, they may have to raise deposit rates as well for asset liability management, said dealers.

The mutual funds are also cautious about lending to others and thus the collateralised borrowing and lending rates (CBLO) reached an intraday high of 8.15 per cent.

G-sec: Bullishness ahead
The sentiment in the government securities market was bullish. The equity market recovered on the back of portfolio investments from foreign institutional investors, said a dealer. Though this will have a lag effect on the liquidity, it will provide support, added the dealer. Moreover, the crude prices which had been the centre of global concern fell from highs of $139 last week to $134 a barrel.

The prices of government papers across maturities rose by 10-15 basis points, with the ten-year benchmark paper 8.24 per cent 2018 closing at 8.26 per cent as against 8.29 per cent on Tuesday. Similarly, the yield on benchmark paper for long term maturity- 8.33 per cent 2036 fell from 8.67 per cent to 8.65 per cent.

Rupee: Looking up
Foreign exchange inflows into the equity market and dollar selling by Reserve Bank of India led the spot rupee to close higher at 42.86/87 after opening at 42.96/98. Dealers said that the RBI sold dollars when the spot rupee was about to breach 43 and figured around 42.98/99 in the beginning of the trading session. Thereafter, foreign banks sold dollars on behalf of their custodian clients.

Another reason that helped the rupee to appreciate was the special window facility provided to the oil companies for buying dollars either as outright purchase or through repo of oil bonds (in exchange for oil bonds).

On Wednesday, the RBI enhanced the repo amount of such bonds for foreign exchange purchases from Rs 1000 crore to Rs 1500 crore on a daily basis. The annualised premia for six month and one year forward dollars closed softer at 2.22 per cent and 1.92 per cent as against 2.62 per cent and 2.17 per cent on Tuesday.

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