Banks sell Rs 1000 crore t-bills

Banks opt for cheaper option to raise funds as overnight rates harden.

Banks today sold treasury bills worth Rs 1,000 crore to meet their credit and reserve requirements, as they found this a cheaper option to raise funds instead of market borrowings.

Banks, which usually borrow from the call money market to tide over temporary liquidity gaps, have kept away from the market owing to a sudden spike in rates.

Call rates closed at 6.75 per cent, almost 150 basis points higher than its usual level. A chief dealer said, "If a bank draws down its near-term treasury bills, its funding cost will be around 6.15 per cent, which is significantly lower than the call rate which is likely to shoot up to 7 per cent."

Traders call this phenomenon of banks selling t-bills when yields are lower than the call rate as "riding on the yield curve".

Liquidity in the banking system continues to be tight. The Reserve Bank of India (RBI) today injected Rs 14,205 crore into the system.

Call rate normally straddles around the reverse repo rate of 5.25 per cent when there is comfortable liquidity in the system. Also tomorrow being reporting Friday, banks skipped the call market.

A trader with a state-owned bank said, "If a bank parks its surplus cash tomorrow, it will cover positions for three days. So, banks did not want to borrow at high rates today."

Over the last one week, call rate "" the rate at which banks borrow overnight money - has been hovering around a three-year high of 7.20 per cent, almost one percentage point higher than RBI's repo rate of 6.25 per cent.

The RBI, on an average, has been pumping in over Rs 20,000 crore daily into the system through repos. The yield on the 10-year corporate bond has climbed to around 7.75 per cent (from around 7 per cent in November), while the benchmark 10-year gilt yield has remained virtually unchanged at around 7.15 per cent or so.

The redemption of India Millennium Bonds in December sucked out over Rs 33,000 crore from the system, which was already strained on account of the huge credit offtake.

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FEELING THE PINCH

Call rates closed at 6.75 per cent, almost 150 basis points higher than its usual level

If a bank draws down its near-term t-bills, its funding cost will be significantly lower at around 6.15 per cent

The Reserve Bank of India today injected Rs 14,205 crore into the system