Analysts discount fears over rising call rates

The country's rising call money rates, which touched a six-year high today, may not be a cause for concern for the market, as analysts see the current liquidity crunch faced by the banking sector to be short-lived.

The inter-bank overnight call money rate surged to 20.00-21.00 per cent today, from 12.25-12.75 per cent yesterday, as banks are seen engaged in greater borrowing activity for credit, which is available at a higher cost.

"The (present) tightness is temporary, and liquidity will improve as the government starts spending. With good advance tax collections, the funds are currently parked with the government. We also expect foreign currency inflows, which will result in the Reserve Bank of India (RBI) buying dollars to solve the problem," said Sandeep Bagla, head - fixed income, Principal PNB AMC.

Bagla observed that repayment of bond coupons and redemptions into special deposit schemes would bring back liquidity into the economy, and the rates would climb down.

The RBI, fighting inflationary pressure in the country and concerned over the flow of cheap credit into the economy, had last month hiked the cash reserve ratio by 50 basis points in two rounds.

Devendra Nevgi, head - fixed income, Quantum Mutual Fund, sees the situation as a measure to control the higher money and credit growth in the economy.

"In developed markets, the stock markets and money markets are usually deeply connected. But in India, the situation is different. We don't think the current situation means much for the capital markets. Only if it lasts long, impact could be felt. But we don't see this happening," he said.

A debt fund manager said, "The RBI has not communicated with banks over the issue. Normally, in these cases, it gives signals to banks about the future movements. This means the RBI is keeping a tab on capital generation cost."

Ashutosh Narkar, banking analyst at India Infoline, compared the situation with the last year scenario when IMD redemptions took liquidity out of the system, and the rates calmed down only in February.

"It's going to be temporary this time. It was expected that the rates would go up following the CRR hike. Now also, the market is expecting a similar announcement by the end of January. But it will calm down as soon as the government spending on infrastructure development projects etc rises," he said.