SBI chairman sees pressure on short-term rates

State Bank of India Chairman A K Purwar said today that short-term interest rates were under upward pressure. The pressure on liquidity continued though it had eased a bit after the redemption of US $7.3-billion India Millennium Deposits on December 29.

"Short-term interest rates are definitely under upward pressure. On the medium and long-end (of the yield curve) it is difficult to say," Purwar told reporters after meeting Finance Minister P Chidambaram.

When asked whether liquidity in the banking system continued to be tight, he said, "There was some bit of pressure (during IMD redemption) but it has somewhat eased...The pressure is still there."

The yield on five-year sovereign bond had moved up to 6.67 per cent on December 30 from 6.57 per cent a month ago.

India Millennium Deposits were raised by SBI five years ago from overseas Indians to finance the country's infrastructure sector.

Purwar said he hoped to retain 15 per cent of the IMD funds or roughly $1.10 billion.

The outflow of Rs 20,000 crore in mid-December towards advance tax outflows followed by outflow of over Rs 30,000 crore to fund IMD redemption had tightened liquidity with call rate crossing 7 per cent.

Banks were also forced to borrow from the Reserve Bank via its daily repo tenders. Call rates have since come down to 5.50-5.70% band.