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Long-term rates remain high while short-term interest rates fall

January, 06th 2011
Short-term interest rates eased as liquidity returned to the system. However, long-term rates still continue to remain high. Interest rates on the 3-month certificate of deposit, or CD rates, dropped to 8.73% from the previous close of 9.05%. One-year CD rates slipped to 9.48% at the turn of the year from the previous close of 9.70%. But at the same time, the yield on the benchmark 10-year government bond fell only by 1 basis point, closing at 8.06%. Bond market dealers said the Central government transferred around Rs 40,000 crore to states between December 27 and December29, which found its way into the banking system, adding to the liquidity. Besides, RBI also bought back four government securities worth Rs 10,000 crore, releasing an equivalent amount into the system. Bankers think the liquidity is here to stay, though upward bias in interest rates is likely to continue. Ramesh Kshirsagar, head of treasuries, Bank of Maharashtra , said, The borrowing from RBI has come down from Rs 108 lakh crore to almost half of it. But its only the short-term rates which have come down, rates in the securities market are still soaring. According to a senior official from the Corporation Bank , It is the government spending which has eased the liquidity in the system. This has little to do with RBIs efforts in easing liquidity, except its open market operations. Also, the credit growth is slowing as the cost of credit has gone up. Market players are sceptical about the responsiveness of the securities being bought back by RBI. Bankers are doubtful about the responsiveness of these securities, due to large gap in the holding costs of these securities and the market prices, said Mr Kshirsagar. The banks borrowed a sum of Rs 87,890 crore from RBI against government securities, which was slightly higher than the borrowing on the previous day, which was about Rs 68,150 crore. The liquidity in the system had eased on back of government spending from a net borrowing of Rs 1.02 lakh crore even on January 3. According to Mr Khirsagar, this liquidity is well within the comfort of RBI, though the fear of rate hikes remains. The four securities bought back by RBI were, 17% 2015, 7.99% 2017, 6.90% 2019 and 7.94% 2021 bond.