CRR hike to draw out surplus funds

OUTLOOK: Money markets

The repo window witnessed a heady rise in subscriptions for the one-day paper this week too, indicating a build-up in the already high liquidity in the banking system.

The daily average subscription size of the one-day repo has shot up to around Rs 25,000 crore last week from Rs 12,000-15,000 crore in the preceding week. On top of this, the outstanding liquidity in the market is currently at Rs 42,000 crore.

However, the 50-basis-point hike in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) on Saturday will be sucking some of that extra liquidity, to the extent of Rs 8,000-9,000 crore.

This, according to bankers, will not impinge the immediate flow of liquidity but might have an effect in the medium term. Moreover, in the medium term, the pick-up in the credit demand, especially from the farm sector, will also start competing with the existing liquidity.

Bankers feel that with so much uncertainty, domestically and globally, over inflation, crude oil prices and interest rates, the market is still expecting a decline in government security yields due to the excess funds sloshing in the system.

Meanwhile, the RBI, through its intervention in the foreign exchange market, is stemming the rise in liquidity to control the inflationary pressures.

The central bank's interventions also help in curbing the foreign exchange outflows in the form of companies' oil payments, which are mostly denominated in dollars. However, as the global crude oil prices have been moving sideways over the past few days, there may be some ease on this front.

The headline inflation rate, which has been going up for the past few weeks, stood higher at 8.33 per cent in the week ended on August 28, compared with 8.17 per cent in the week ended August 21. The rise in the inflation rate has been on account the rise in the prices of primary articles and commodity prices.

According to bond dealers, the rising inflation is likely to impact the interest rates, which are poised to go up at this point as indicated by all the economic parameters, but in the coming weeks, it might peter off due to the base impact. They, however, feel that the inflation rate will start to moderate in the coming weeks due to base-year effect.

Call money rates seen hardening

Going by the outstanding liquidity of Rs 42,000 crore, call money rates should stay comfortable this week too. But the overnight rates may harden slightly due to an outflow of around Rs 13,500 crore from the banking system.

The sources of outflow are: Rs 5,000 crore in advance taxes, Rs 4,500 towards CRR tightening and Rs 4,000 crore towards the market stabilisation scheme (MSS). Inflow will be a measly Rs 470 crore.

Another reason is the banks' aggressive trading in the government securities market after they have been permitted to transfer SLR securities to held-to-maturity category. Moreover, credit pick up is also in full swing. So, in the medium term, call money rates might go up.

Two sets of t-bill auctions lined up

Two sets of treasury-bill auctions will be held this week. There will be a 91-day t-bill auction for a notified amount of Rs 2,000 crore "" Rs 500 crore towards government borrowing programme and Rs 1,500 crore towards the MSS.

Another auction will be of 364-day t-bill for a notified amount of Rs 2,000 crore "" Rs 1,000 crore for government borrowing porgramme and Rs 1,000 crore towards MSS.

The cutoff yields on these paper are expected to be on a par with the market's expectations but less than the earlier cutoffs.

Market participants are of the view that though the cutoff rates on these papers would be as per the market's expectations, the RBI has the option to reject bids if it were to give a signal that the current rates are not comfortable.