Fund crunch fuels call to 8.15%

Banks avail of arbitrage offered by lower CBLO rates.

The overnight call rate shot up by 90 basis points to 8.15 per cent today amid tightening liquidity, which prompted banks to take advantage of the arbitrage offered by lower rates in the collateralised borrowing and lending obligation (CBLO) market.

CBLO is a mechanism through which banks and non-bank entities can lend or borrow funds to each other through the negotiated dealing system.

Several banks borrowed at around 6.5 per cent from the CBLO market and lent money in the inter-bank call money market at over 8 per cent, dealers said.

The interest rate differential in the two markets offered a clear profit of 150 basis points. Banks with investments in statutory liquidity ratio (SLR) securities in excess of the minimum requirement of 25 per cent of net demand and time liabilities are able to make use of the CBLO window.

All borrowings and lendings from this window happens against securities pledged. The CBLO rate closed at 6.52 per cent today with total volumes of Rs 13,156.00 crore.

Many banks do not have the luxury of excess SLR investments and had to borrow from the call money market even thought rates were high to meet reserve requirements.

"Most big banks, which have funds, can take advantage of this arbitrage as far as they do not reach their respective exposure limits," said a chief dealer with a state owned bank.

Another dealer said this was a natural outcome of the cash crunch in the domestic banking system.

"A bank, irrespective of its size, cannot borrow short-term funds at 8 per cent levels everyday. Call rates have been trading above 7 per cent for more than three weeks now. With funds drawing down from the system, these rates will continue to hover at existing levels for another three to four days."

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 8.15 per cent today, almost 265 basis points higher than the reverse repo rate. Call rates are usually around the reverse repo rate when there are adequate funds in the market. The Reserve Bank of India (RBI) today injected Rs 20,595 crore through the repo window.

CBLO, a money market instrument approved by RBI, is a product of the Clearing Corporation of India (CCIL). Financial entities such as mutual funds, primary dealers, banks and insurance companies are participants in the market.

"CBLO offers an opportunity to banks to deploy their funds at better rates to non-bank counter parties. Banks can now lend at a surplus lending rate margin of 150 basis points over the call money market through the instrument,'' said a bank official.

The argument for this pricing relationship relies on the arbitrage opportunity that results if there is divergence between the value of calls and puts with the same strike price and expiration date. Arbitrageurs would step in to make profitable and risk-free trades, said analysts.