The Hindu Business Line : Call rates go up on liquidity pressure

According to dealers, bankers also borrowed short-term money from the Reserve Bank of India to tide over the shortfall. The RBI is expected to introduce a second Liquidity Adjustment Facility, to help bankers meet their cash requirements.

Dealers estimate that Rs 6,000-10,000 crore had gone out of the system by cash withdrawal during the festival season, as corporates withdrew huge amounts to pay bonus and salaries.

The RBI had also auctioned two government papers mopping up another Rs 8,000 crore.

"The current liquidity tightening is short-term and is likely to improve next week. This is typically noticed after Diwali, as there are huge withdrawals during the festival period," said an official of Bank of India.

In the last few weeks, oil companies have also been borrowing heavily. This temporary demand has aggravated the pressure on liquidity, said another public sector bank official.

There were also reports that the central bank sold dollars when the rupee breached the psychological level of 46. This added to the rupee shortage in the system. Some bankers also point to heavy borrowing by mutual funds to meet their huge redemption pressure, as another reason for the lower liquidity.

Mr Moses Harding, Executive Vice-President, IndusInd Bank, said, "Mutual funds have shifted their short positions from an overnight surplus position to deficit because of the huge redemption pressure they are facing. The market has hence been unable to absorb this mismatch," he said.

With the Sensex shedding its gains, after touching 8,821 on October 5, investors would have redeemed their MF units.

In fact, in a bid to ease the liquidity crunch, the RBI had injected money into the system through the repo auction. From November 9-11, RBI has lent Rs 7,815 crore to banks.

As the call rates rose to more than 7 per cent, banks found it more profitable to borrow from the RBI at 6.25 per cent. "What a bank looks at is cost. If the call rate is higher, banks will go to repo," said an official from Bank of Baroda.

As November 11 was reporting Friday, several banks may have also borrowed to maintain their cash reserve ratio, said Mr D.C. Pai, General Manager, Syndicate Bank.

It will take some time for the `bonus money' to come back into the system, said the official from Bank of Baroda. "Once the bonus is disbursed, it will come back into the system, but this will take a few days. It is a cycle," he said.

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