Treasury managers breathe easy as fund worries wane
The race for liquidity continued in the local money markets as call rates rose to 70% while the rupee swept past the 43.5-mark vis-à-vis the dollar.
By TNN |
MUMBAI: The race for liquidity continued in the local money markets as call rates rose to 70% while the rupee swept past the 43.5-mark vis-à-vis the dollar. The fact that the proposed bank strike has been called off has helped banks in overcoming concerns on liquidity which had forced them to borrow heavily over the past two days.
Rates in the inter-bank call money market opened the day in the range of 25-30%, but rose to an intra-day peak of 70%. However, towards evening, there was news that the proposed three-day strike by state-owned banks, which could lead to softening of call rates on Thursday.
“There were two main factors which were worrying market sentiments, one being the huge fund outflow due to advance tax payments and two, the impending bank strike, both of which have now been laid to rest,” said a treasury manager with a private bank.
In another move, the Reserve Bank of India has allowed banks to borrow through the repo window and subsequently, use these funds for lending purposes in the call money market. The central bank on Wednesday infused a total of Rs 43,000 crore through the repo operations under the two sessions of liquidity adjustment. On the other hand, it did not mop up any funds through reverse repo operations.
RBI specified that inter-bank lending is part of normal money market functioning that enables daily liquidity management by market participants having temporary mismatches The central bank released a note, clarifying that through resources accessed from the LAF window should not be used for on-lending by banks, the recourse to LAF by market participants should not be persistent for funding balance sheets.
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The central bank rejected bids worth nearly Rs 8,000 crore under the two auction programmes of 91- and 182-day treasury bills, in a bid to prevent yields from rising further. The rupee also continued its two-day rally, breaching the 43.50-mark against the dollar, thus touching a 19-month high. It ended the day at 43.45 per dollar, 40 paise stronger from the previous close of 43.85 levels on Tuesday.A senior treasury official said, “Importers may now look at coming in to book contracts to cover some of their unhedged exposures, given that there are no overseas dollar-related concerns at the moment.”
However, sensing that the current rupee gains are driven more by the tight liquidity conditions rather than supply-related issues, exporters may keeping funds in the EEFC accounts rather than covering their positions. They may expect the local currency to return to 44 levels once call rates stabilise, said another treasury official.
Other sources in the industry believe that even though the RBI has been cautioning banks from using the call market as a perennial source of funds for managing their credit demands, given that call rates are much lower than term rates, the very fact that call rates have spiralled to 70% levels within two days could signal some further action from the RBI. This may include lowering of the borrowing limits enjoyed by banks in the call market.
“Currently, banks are allowed to borrow up to 100% of their Tier-I capital in the call market. The central bank may look at cutting these limits to 50-75% levels in the near future,” informed a treasury official.
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