Speculation that the Reserve Bank of India (RBI) will hike key policy rates in its mid-quarterly policy review on Thursday pushed up call money rates to a high of 7.10 per cent on Tuesday.
“We expect RBI will hike both repo rate and reverse repo rate by 25 basis points each on March 17 in the backdrop of rising inflation,” said a bond dealer with a domestic brokerage firm.
Also, there is pressure on liquidity on account of advance tax outflows that are expected to be around Rs 60,000-70,000 crore by dealers. “The actual payment to the government is on Wednesday when the call rates may push up further,” said the dealer.
According to data provided by the Clearing Corporation of India, volumes in the call money market on Tuesday were Rs 17,786 crore, up from Rs 16,492 crore a day before.
Another factor that drove up call rates is the start of the new reporting fortnight ending on March 25. Banks typically tend to borrow to meet their regulatory requirements for the fortnight in the initial few days.
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Bank borrowings from the RBI shot up to Rs 1.17 lakh crore in twin repo auctions under the Liquidity Adjustment Facility. On Monday, banks had borrowed over Rs 90,000 crore. “Banks will try to meet most of their fortnightly obligations before RBI hikes rates and hence repo borrowings will remain high for two more days,” said a treasury official with a public sector bank.
Inflation for the month of February was up at 8.31 per cent from 8.23 per cent in January 2011.
“We see March inflation near the February level and with fuel price changes over the next few months, we see an average of over 8 per cent for first half of FY12,” said Abheek Barua, chief economist, HDFC Bank. RBI had projected that inflation would cool down to 7 per cent levels by March 2011.