Call rate dips to 4% on infusion of liquidity

Strengthens expectations of moves by RBI to suck out liquidity.

The overnight call money rate closed at 4 per cent on Tuesday, falling below the Reserve Bank of India's borrowing (or reverse repo) rate of 6.00 per cent for the second time in two weeks this month.

This drop follows a significant infusion of liquidity of Rs 20,660 crore as a result of redemption of an 11.9 per cent 2007 series bond.

The redemption swamped the outflow of Rs 8,000 crore towards the auction of two bonds, strengthening expectations of moves by the RBI to suck out liquidity.

Liquidity has also expanded because the Reserve Bank of India (RBI) has been intervening in the forex market since Monday to check the strengthening of the rupee, which rose to a fresh nine-year high of 40.28 to the dollar.

Dealers say the RBI is likely to have mopped up around $500 million from the market on Monday alone to bring back the rupee to around 40.51 to the dollar.

"In the absence of any liquidity-absorbing instrument like market stabilisation bonds, the system is awash with liquidity," said a call dealer in a public sector bank.

With call rates dropping sharply, he added that banks are lending funds even at 1 per cent in CBLO (or collateralised lending and borrowing obligation), an instrument that lends rupee funds against government securities.

The call rate had been ruling high due to tightening liquidity, even touching 50-60 per cent in March 15 as a result of demand for advance tax outflows.

Earlier this month, however, the call rate fell to a low of 1 per cent on the back of excess liquidity in the market triggered by government expenditure, coupon redemption and RBI intervention to stem the appreciation of the rupee.