Call rate touches all-time low

Excessive liquidity, slower credit offtake take their toll.

With liquidity flooding the markets, banks were lending money virtually for free in the overnight market today as rates dipped below yesterday's close of 1 per cent, an all-time low.

Funds were borrowed in the call money market at rates as low as 0.10 per cent, which, for example, can fetch only Rs 2,740 for Rs 100 crore lent for a day.

"Banks are lending at low rates because they have no choice. It is better than keeping it at zero," said the chief treasurer of a south-based public sector bank.

Call rates have been falling steadily, closing more than 4 percentage points lower over the week alone.

High liquidity in the system is expected to continue due to the cumulative effect of the redemption of Rs 20,000 crore worth of bonds earlier this week, the Reserve Bank of India's (RBI) purchase of dollar to prevent the rupee from rising above the Rs 40 level and government spending.

Credit off-take in the last month or so has also been moderate, which has led to a liquidity build-up of more than Rs 50,000 crore with banks.

Further, the RBI has capped the amount it borrows at 6 per cent from banks through its daily reverse repo window at Rs 3,000 crore. Compounding the liquidity situation, some banks have reached individual exposure limits.

The excess liquidity saw overnight rates in the repo market, where participants borrow against government securities, and in the collateralised borrowing and lending obligations (CBLO) market drop to lows of 0.01 per cent and 0.15 per cent, which together account for about 70 per cent of the country's overnight market.

Meanwhile, the rupee has appreciated by 8.7 per cent in the last nine weeks. The sharp appreciation of the rupee is expected to worsen the country's trade deficit, which widened in April 2006 to a record $7.06 billion on import of oil and other goods, against $3.94 billion a year earlier.

Next week, the excess liquidity may be partly sucked out with the Rs 9,000 crore of regular government borrowing and liquidity absorptions of Rs 5,000 crore (double the normal) by the RBI under the market stabilisation scheme and about another Rs 20,000 crore of outflows expected on account of advance tax payments by companies by June 15.

The RBI, which tries to keep the call money rate in the reverse repo-repo band of 6.0-7.75 per cent, did not take steps to modulate liquidity given lower inflation due to a higher base last year.

The wholesale price index rose 5.06 per cent in the 12 months to May 19, lower than 5.27 per cent a week earlier and well below a two-year high of 6.69 per cent in late January.