Call rates seen at 30% by end of week

Inter-bank call money rates are likely to shoot up to 25-30 per cent towards the end of this week as the financial year-end pressures are seen squeezing liquidity. Banks borrow funds in the call money market for a day to meet their reserve requirements.

The tightness in liquidity will be much more pronounced as banks are expected to borrow to expand their balance sheets to meet annual targets, dealers said.

The last fortnightly reporting Friday of 2006-07 is on March 30, when banks submit to the Reserve Bank of India (RBI) their deposit and advances positions.

The last week of the financial year started with call rates in double digits, after having cooled to high single digit from the decade's high of 75 per cent over a week ago. The call rate yesterday opened at 14 per cent and closed at 14.50 per cent, after an intra-day high of 16 per cent.

The banking system is short of liquidity by about Rs 80,000 crore and the RBI is unlikely to let the system be flush with funds on account of government spending, dealers said. The central bank's greater worry at the current juncture is inflation and it would under no circumstances allow large liquidity to flow to banks, they added.

While the government has assured the market of an expenditure of around Rs 21,000 crore during the week, dealers fear that the RBI may not like liquidity easing.

The market expects inflation to remain at above 6 per cent till April 6. Liquidity in the system is highly skewed with some banks facing acute liquidity crunch and borrowing around Rs 37,000 crore from the RBI through the one-day repo (repurchase) window against government bonds held.

Moreover, banks desist from lending in the call money market as it attracts full provisioning towards the year end, since the lending is not backed by any collateral. The call rates may rise to 25-30 per cent on Thursday and Friday.

Dealers said there could be attempts by banks to keep the yields on government bonds in a tight range even in a tight liquidity situation to avoid having to report higher losses due to depreciation in the value of investments. The yield on the benchmark 10-year bond is expected to be in the range of 7.96-7.98 per cent.

Corporate bond portfolios of banks would be worse hit since the spread between the 10-year gilt and triple A-rated bond of similar maturity has widened to 145-150 basis points from 70-80 basis points a year ago, dealers added.