Friday, December 21, 2007

Banks’ cash conditions further strain due to rise in call rates

The banks’ cash conditions come under the further strain due to ongoing festive season, an extended weekend, coupled with banks’ needs to meet reserve requirements. Earlier this month there was outflow of advance taxes and a hike in the cash reserve ratio announced by the Reserve Bank of India (RBI) in October, liquidity in the money market all these factors contributes to the tightening of the cash conditions.

Banks, which were depositing funds worth Rs 20,000-30,000 crore with the central bank on a daily basis in October, have now begun borrowing funds from the central bank through the repo window by parking surplus government securities held under the SLR basket.

In advance of a five-day extended weekend, banks have borrowed more than Rs 20,000 crore from the Reserve Bank of India (RBI) at its daily repo window. The demand for cash usually rises during the festive and holiday season, call money rates have crossed the 8%-mark, reflecting a severe crisis in cash conditions as markets will be closed on Friday for Id and will also be closed on Tuesday for the Christmas celebration.

If the banks go for other alternative for borrowing money other than RBI is the inter-bank call money market. Call rates were found quoting at over 8%-levels in the morning. Whereas it is cheaper to borrow from RBI as it charges at 7.75% levels. But the banks with an excess SLR can borrow from RBI and the rest have to resort to the call and CBLO markets. According to traders, some banks did start lending in the call and CBLO markets, in an attempt to leverage high rates there. But with the declaration of the LAF results the rates on these markets dipped. Rates in the CBLO market went as low as 1%, while call rates touched the 4%-mark.

Given that this weekend was also a reporting fortnight; banks were also forced to borrow from the central bank because they had to maintain reserves to meet cash reserve ratio provisions. Axis Bank president of treasury Partha Mukherjee said, “The tightness in cash conditions has increased recently, mainly due to the advance tax payouts that took place last week. Earlier, the effect of such payouts would be neutralised within a couple of days, but now it takes a relatively longer duration. Also, the long weekend ahead is contributing to the tightness, with players building up positions. Call rates may not come down soon. As long as they are stable, the markets will be able to cope with the present rates.”

Looking at the bond market, gave way to some comfort in the lower inflation figures and eased by a few basis points. The bond market saw trading volumes of around Rs 4,000 crore. Of which, the benchmark paper saw trades of around Rs 1,300 crore.

A senior treasury manager at a bond house said, “The signs of a rally at the shorter end of the curve are getting more visible. Much of the trade on Thursday was concentrated in the 9-10 year segment, where yields dipped by around five basis points. Once cash conditions improve, these securities would be the most preferred lot.”

The capitulation on the 10-year benchmark bond, the 7.99% bond maturing in 2017, ended at 7.87%, a notch below the previous close of 7.88%. Liquidity conditions in the banking system are expected to prevail under pressure at least till the end of this year. Treasury managers are of opinion once the New Year begins, the situation may see some improvement. “This is on the back of the government beginning its spending exercise and some inflows on account of interest payments (worth around Rs 22,000 crore) on special deposit schemes (SDS) to superannuation funds,” said IDBI Gilts head-fixed income S Raghavan.

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