Leading public sector banks are actively seeking arbitrage opportunities in overseas markets, resulting in drying up of liquidity in the banking system and an integration of the forex and the local markets.
Consequently, call money rates have moved up to between six and nine per cent from five per cent, despite the announcement of a cut in the cash reserve ratio in the busy season credit policy.
State Bank of India (SBI) is deploying surplus funds in the US call money market, term money market and in treasury bills, said SBI officials. SBI has reportedly invested around $275 million in the overseas market subsequent to the credit policy.
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Bank of Baroda too has parked an additional $85 million in international markets. Bank of India and Punjab National Bank are said to be firming plans for investing overseas.
At present, banks are able to get a 10 per cent return, inclusive of interest and forward premium, in the international market.
While domestic call money closed at 9.25 per cent yesterday, the 14-day treasury bill rate stands at 4.96 per cent and repos offer four per cent. There are not many takers even for three month money at 9.50 per cent.
The Reserve Bank, in the busy season credit policy, allowed banks to invest upto 15 per cent of their tier-I capital in overseas money market instruments against the earlier limit of $10 million.
So far, foreign banks had taken the lead in availing of arbitrage opportunities. However, public sector banks viewing treasury operations as profit centres are placing funds abroad for time periods ranging between one day to three months.
The integration of the local and forex market is also taking place as banks arbitrage between domestic and international money markets.
Once the number of banks indulging in arbitrage operations increases, the forward premiums will move down and the call rates will increase leading to an equalisation between domestic and international rates.
Money market players feel that even if surplus funds increase it is unlikely that the call rates will decrease to March-April levels of two to three per cent as it will open up arbitrage opportunities.