Call rates poised to dip

The tight liquidity condition is expected to ease a little over a fortnight from now to help the overnight call money rate settle below 10 per cent. Bankers, however, feel the rate will still remain high "" above the rate at which banks avail liquidity from the Reserve Bank of India (RBI).

The flow of advance taxes paid by corporates back into the banking system through government spending is seen lessening the squeeze in liquidity, which is expected to be further drained by the 25 basis point second phase increase in the cash reserve ratio from January 6. One basis point is one hundredth of a percentage point.

But, banks and analysts say the real relief from liquidity pressure will come from consciously slowing down of credit growth, which has been primarily driven in the last few years by housing loans.

"The fortnight after the (January 6) cash reserve ratio hike is important. The market is geared (expecting) for (call) rate to settle in a range of 8-8.5 per cent. If the rate settles in double digits, then the situation will be different," a treasury head with a private bank said.

The expected overnight rate is much higher than the repo rate of 7.25, the rate at which the RBI provides liquidity to banks against government securities.

The RBI continues to inject liquidity into the system with the repo balance as of today being Rs 34,200 crore.

Banks with not enough margin above the minimum statutory liquidity ratio have been borrowing from the inter-bank call money market. Banks borrowed close to Rs 20,000 crore at rates ranging from 15-20 per cent on Friday, the last trading day of 2006.

Bankers said the RBI's warning when it tried a different monetary measure (25 basis point hike in the repo rate) to rein in credit growth in October 2006 went unheeded, but the surprising use of the cash reserve ratio as a monetary tool was expected to have a more telling effect, after the first 50 basis point hike in the cash reserve ratio in September 2004 and the subsequent increases in the reverse repo rate.

The RBI hiked the cash reserve ratio by another 50 basis points in two equal phases from December 23, 2006, and January 6, 2007, to rein in credit and inflation expectations.

"It is true that some banks are short of funds. But they could be overmaintaining required balances in the cash reserve ratio. We need to see whether the system is really short of Rs 34,200 crore (infused by the RBI through repo) or overmaintaining," a treasury head of another bank said.