Call Seen In 15-50% Band

MONEY MARKET

The interest rate in the inter-bank overnight money market is expected to rule in the band of 15 per cent to 50 per cent during the course of this week, subsequent to Reserve Bank of Indias decision to jack up interest rates across maturities. Money will be tight on Monday and then sanity should hopefully be restored from Tuesday onwards.

On Saturday call rate had skyrocketed to over 100 per cent and then came down to 25 per cent. In fact, a stray deal was done at 140 per cent. The banking system had to make free Rs 2,500 crore to be paid to RBI as the hike in CRR came into effect. Banks also had to surrender the excess refinance drawn from RBI. Prices of government securities came crashing down.

The price of the 12.59 per cent 2004 paper crashed to Rs 98, the price of the 12.50 per cent 2004 came down to Rs 96.50, the price of 10.85 per cent 2001 was down to Rs 95. The 13.70 per cent 1999 was dealt at Rs 100.80, and the 13.85 per cent 2006 was dealt at Rs 103.

Liquidity has been sucked dry following the RBIs decision to hike the cash reserve ratio (CRR) from 10 per cent to 10.5 per cent which would lead to an estimated outflow of Rs 2,500 crore from the system. At the same time, RBI has reduced the refinance limits, under general refinance facility from Rs 4,500 crore to Rs 1,125 crore and under the export credit from around Rs 2,000 crore to Rs 1,000 crore.

The sentiments in the securities markets has plummeted to its depths. Since there was a sharp fall in securities prices on Saturday, there could be some correction during the course of the week.

There is not likely to be any panic selling and volumes are expected to be poor. With call rates ruling high, interest in securities will be limited and prices will remain stagnant.

In the scheme of things, the primary dealers are relatively less affected because they get liquidity support from Reserve Bank of India provided they do not lend in the call money market.

With interest rates moving up refinance rates have also moved up and repos rate has been hiked to 9 per cent. But this floor is going to be more of academic in nature as call rates will be in excess of 20 per cent.

Given that secondary market yields have moved up, players want a higher cut off at the auction of treasury bills.

The Reserve Bank of India rejected both the bids it received at the auction of 364-day treasury bills, and for the first time in this financial year no bids were accepted at the fortnightly auction. The RBI also decided to retain the cut off yield on 14-day and 91-day treasury bills at 7.06 per cent and 7.23 per cent.