Looming govt auction forces banks to opt for CBLO

Banks have opted for the instrument to ensure adequate liquidity.

Preparing for a liquidity outgo of Rs 10,000 crore over the next two days on account of the government auction, banks have opted for collaterallised lending and borrowing obligation (CBLO) to ensure adequate liquidity.

Trades in CBLO touched its peak of Rs 12,456 crore as rates ranged between 4.90-5.50 per cent against the conventional inter-bank call rate of 5.80 per cent.

In the call money market, banks borrow and lend without collateral. In the case of CBLO, the borrowing bank needs to pledge government security.

The Reserve Bank of India (RBI) mopped up Rs 10,785 crore in reverse repo bids. Even then the sentiment remained bearish. The 10-year paper 7.38 per cent 2015 closed at 7.08 per cent against a close of 6.98 per cent on last Friday.

"The outlook is bearish as there are no inflows this week either through coupon redemption or maturity of government securities.

On the other hand, Rs 10,000 crore will be sucked out through the government borrowing programme followed by Rs 4,000 crore through a treasury bill auction. This has put pressure on the liquidity," said a money market dealer.

Net outflows will be of Rs 10,000 crore as there will be treasury bill redemption to partially balance the outflows. As against the record high volume in CBLO, call money market volumes stood at Rs 5,063 crore.

Factoring the bearish sentiment, prices of government securities fell by almost 40-80 paise.

On the other hand, anticipating a liquidity crunch in the money market, foreign exchange dealers booked near term forward dollars.

One-month forward dollars shot up to 2.05 per cent against 1.93 per cent on Friday. Six-month and one-year dollar closed at 1.59 per cent and 1.37 per cent, respectively.