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Short-term rates in the secondary market rose to a one-year high due to further liquidity tightening measures announced by the Reserve Bank of India (RBI) earlier this week. In the secondary market, rates of Commercial Papers (CPs) and Certificate of Deposits (CDs) rose to levels seen in March 2012.
With secondary market rates breaching the 11 per cent mark, there were no issuances in the primary market.
Even in the inter-bank money market, call money rates rose sharply. The weighted average three-day call money rate rose to 10.01 per cent on Friday, compared with 8.32 per cent on Thursday. On Tuesday, RBI had further tightened liquidity by capping Liquidity Adjustment Facility borrowings to half per cent of each bank’s deposits.
“These rates do not reflect the true market rates because these rates rose due to RBI's liquidity tightening measures,” said Ramesh Kumar, senior vice president (debt), Asit C Mehta Investment Intermediates.
Typically in March CD/CP rates inch up. However, this year was an exception as interest rates had dropped and CD issuances had come down due to finance ministry norms. Because of the falling CD rates, CP rates had also come down, as buyers of these short-term papers did not allow the spread between CDs and CPs to widen drastically.
On Saturday, a new reporting fortnight starts and as per RBI norms announced late evening on Tuesday, banks would be required to maintain a minimum daily Cash Reserve Ratio balance of 99 per cent of the requirement. “This would result in call money rates touching 11 per cent next week,” said Baljinder Singh, government bonds dealer at Andhra Bank.
However, according to economists, the liquidity tightening measures announced by RBI would affect those banks which have a huge dependency on short-term funds more. “Those banks, which have created a huge dependency on short-term funds, are very vulnerable. These banks at some point of time will have to raise their lending rates, else they won't be able to maintain decent Net Interest Income growth. RBI is trying to restrict the impact of these liquidity tightening measures to the shorter end of the curve. But if these banks are forced to raise their lending and deposit rates, then some spillover will be there in long-term rates too,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
