The tightness in the liquidity situation escalated on Friday, with the interbank call money rates jumping the highest in six years to close at 19 per cent. The rates had touched 25 per cent intra-day.
According to market dealers, the surge in the call rates was due to banks rushing to raise resources to tide over the tightness in liquidity, outflows towards the first tranche of the hike in the cash reserve ratio, and the four-day weekend.
The call money market, the avenue for banks to raise short-term fund of two to three days without offering any collateral of securities, has been rising for over a fortnight now.
Even as the Reserve Bank of India infused liquidity to the tune of Rs 32,000 crore into the market, a window was available for banks with excess government securities to pledge as collateral for funds.
Therefore, banks resorted to various measures for tapping funds from the market. They raised short-term deposits of 7-15 days from mutual funds at 15-20 per cent, and even public sector and private sector banks raised one-year certificate deposits at 9.25-9.5 per cent.
Banks with excess dollars resorted to swapping them into rupees, thus pushing up the rates, since rupee premiums to be paid for swapping had also shot up to 3-4 per cent for six months, said a dealer.
Dollars were exchanged for raising three to four day rupees in the cash-tom (cash for tomorrow) market at 23-24 per cent.
To take advantage of the excess portfolio of government securities, PSU banks borrowed funds from the RBI at 7.25 per cent and lent it to the market at 20-21 per cent, thus earning a clean arbitrage of 11-12 per cent during the quarter end.
Interestingly, while banks were struggling for funds, they managed to move the prices of government securities up and those of yields down, to book profit on the investment portfolio during the end of the quarter.
The prices of government securities went up by 10-12 paise in the benchmark securities, thus pushing down the yield on the 10-year paper to 7.6150 per cent, as against 7.63 per cent yesterday.
The 10-year yield stood at 7.62 per cent at the beginning of the quarter. In addition, banks resorted to the traditional export refinance windows of the RBI and Small Industrial Development Bank of India.
According to bankers, the frenzy for funds is aimed at preparing the balance sheet for the quarter-end and due to extra caution over the hiked cash reserve ratio.
