RBI pumps Rs 3,940 cr into system via repo

The yield on benchmark 10-year paper pierced the 7 per cent mark to close at 7.21 per cent yesterday, rising 26 basis points on a single day on higher inflation rate and tight monetary conditions.

Banks sought liquidity support from the Reserve Bank of India of Rs 3,940 crore at 6 per cent as a last resort to tide over the extreme tightness of funds in the market yesterday. The banking system deposited only Rs 100 crore as a surplus with the RBI under the reverse repo system.

The call rates, the rate at which banks can lend and borrow funds from the market, rose 6 per cent.

In the backdrop of a liquidity shortage, the market expects a cut off yield of 7.05/7.15 per cent for the 5-year government paper to be auctioned on November 8. There is also a likelihood of RBI cancelling the auction considering the liquidity crunch in the system, banking sources said.

Inflation rate played spoilsport by firming up to 7.38 per cent for the week ended October 22 against 7.10 per cent last week. Dealers felt that the rates might go up further with the government's decision to raise oil prices.

International oil prices have also firmed up and are expected to go up further with re-elected US president George Bush planning to go head with his plan of restoring democracy in Middle East in full swing, said a foreign bank dealer.

The bonds market reeled under a bearish sentiment with the benchmark paper 7.38 per cent 2015 closing at 7.21 per cent, the highest level in the recent past. While there was no trades in the long-term papers, the medium term of the maturity fell by almost Rs 2 . The prices in the short term papers dipped by Re 1.

"We thought he worst is over but it seems that is not the case . The rates are likely to go up further," said State Bank of India chairman AK Purwar on the sidelines of a function.

On the other hand, most dollar-surplus funds sold dollars and generated rupee funds to meet the day's requirement. As a result of this, the spot rupee that opened at 45.17 but gained all the way to 45.04.

However, heavy corporate demand for dollars led to the spot rupee closing at 45.2050/21 to a dollar.