With abundant liquidity in the system and call money rates coming back to normal, primary dealers (PDs) have found no borrowers in the last three months.
Total lending by PDs has come down to Rs 24 crore in January compared to Rs 524 crore last October. For the weeks ended January 30 and February 6, PDs were only borrowers in the call money market. Similarly during November and December, the total lending by PDs stood at Rs 60 crore and 50 crore, respectively.
According to some dealers, the lending activities were higher in October as the call rates had skyrocketed to 35-40 per cent from the normal levels of 4.5 per cent.
“During October, with the call rates rising over 30 per cent, primary dealers were active on the lending side to take arbitrage advantage. Now that sort of interest rate differential is not there, hence the lending has come down,” said a dealer.
Though the lending of PDs has slowed down in the last three months, their borrowings have increased, especially during the first six weeks of 2009, which indicates that the dealers are finding it more lucrative to invest in government securities (G-Sec).
“Unlike October, thanks to the steps taken by the Reserve Bank of India (RBI), banks are flush with money, so they are not borrowing from the dealers. In addition, with the softening of the yields, investments in G-Sec have emerged as a safe bet,” another dealer said.
While the total borrowings stood at Rs 3,719 crore in October, it more than doubled to Rs 8,824 crore in the first six weeks from January. Another reason behind PDs investing more in G-Secs might be attributed to the increase in government borrowings.
“The government borrowings have increased in the recent weeks, so in order to participate in auctions, the primary dealers have to keep on subscribing the securities,” said a treasury head of a public sector bank.
