Mumbai: Indian overnight cash rates surged to their highest in two years on Friday as mutual funds faced redemption pressure from banks to refund subscriptions to the Coal India share sale, dealers said.
At 12:32 pm, the three-day inter-bank cash rate was at 10.90/11.00%, after rising to 12%, its highest since 31 October 2008 and compared with 6.40/6.50% at close on Thursday, according to Thomson Reuters data.
The share sale, which received mostly bids from overseas funds, left the collecting banks with dollar funds, which they sold for rupees to pay for the IPO and had parked the funds with money market mutual funds until the day of payment, they added.
“The collecting banks are now redeeming their money from mutual funds as they have to pay to the banks who will give the refunds back to investors,” said a dealer associated with the development.
The government will raise close to $3.5 billion from the sale of a 10% stake in Coal India, the world’s largest coal miner. Coal India shares will begin trading on 4 November, with allotments likely to be finalized by 1 November.
The oversubscribed amount at Coal India IPO will be refunded by Monday.
“Only few refund banks who are getting the money from collecting banks have excess rupee liquidity and that has created a skewed liquidity condition,” said a dealer at a foreign bank.
The liquidity imbalance was evident from the large amount of bids at the Reserve Bank of India’s both repo and reverse repo auction.
While borrowing at the repo rose to Rs1.3126 trillion, highest since at least September 2009, some banks also parked their surplus Rs139.50 billion at the reverse repo window.
On Thursday, banks had borrowed Rs889.70 billion from the repo auction.
Demand for cash was also high from foreign banks who were buying rupees in the spot market to honour their forward dollar commitment maturing next week, dealers said.
“Foreign banks are rolling over their month-end forward dollar contracts to pay to their offshore investors next week,” said the foreign bank dealer, adding that this monthly occurrence added to the pressure on the cash rates.
Dealers expect the call rates to come off early next week once the Coal India IPO allotment is done.
The weighted average rate in the call money market was 7.99% compared with Thursday’s 6.60% and that in the collateralized borrowing and lending obligation (CBLO) market was 8.67%, from previous 6.10%.
Volumes in the call market were a heavy Rs92.90 billion compared with Rs140.18 billion at close on Thursday. In CBLO, it was Rs135.05 billion versus Rs400.85 billion, CCIL data showed.