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Business News/ Politics / Advance tax outgo to raise call money rates
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Advance tax outgo to raise call money rates

Advance tax outgo to raise call money rates

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Mumbai: The overnight interbank call money rate—the rate at which banks lend to each other—could rise briefly by the end of the current fiscal, reaching as much as 4.75%, which is the Reserve Bank of India’s (RBI) repo rate—the rate at which banks borrow from RBI.

The overnight interbank borrowing rate on Thursday was 3.3%. The rate is set to rise because of an anticipated decline in liquidity on the outflow of advance tax payments and higher cash reserve requirements set for banks by RBI, according to money market watchers.

In its January monetary policy announcement, RBI had raised the cash reserve ratio (CRR)— the portion of deposits banks must keep with RBI—by 75 basis points (one basis point is one-hundredth of a percentage point) to 5.75% in two phases ended 27 February. This drained Rs36,000 crore from the system.

Despite this, banks continued to park large amounts with RBI. The surplus liquidity after the CRR hike peaked to Rs84,520 crore on 5 March. On Wednesday, it was Rs83,605 crore, but fell by more than half on Thursday when banks parked only Rs39,225 crore.

The reason for the fluctuation, according to bankers and bond dealers, is the way banks manage their excess funds ahead of every alternate Friday—when they must report their CRR levels to RBI.

On other days, though, they need to maintain only 70% of the reported amount. Since banks prefer to report full cash requirements closer to reporting Fridays, this raises call rates if there is not enough liquidity.

The remaining amount is parked with RBI’s liquidity adjustment facility (LAF) window that offers 3.25%. CRR requirements carry zero interest.

“The amounts seen in (the) LAF window may not reflect the true picture," said A. Prasanna, chief economist of ICICI Securities Primary Dealership Ltd, a bond trading house. “The system liquidity after the CRR hike should be around Rs65,000 crore as per our estimate."

S. Srikumar, a bond dealer for Corporation Bank, said the impact on liquidity due to advance tax outflow beginning 15 March will be about Rs45,000 crore.

In such a scenario, the interbank call money rates may touch the repo rate of 4.75%, the theoretical upper end of RBI’s rate corridor, where all interbank rates ideally should be. “That is because distribution of liquidity could be skewed and some banks may have to borrow at the repo window," Prasanna said.

However, ING Vysya Bank Ltd economist Deepali Bhargava expects the interbank rates to rise only marginally as the government will push through higher spending to meet its year-end obligations, including spending on salaries.

anup.r@livemint.com

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Published: 11 Mar 2010, 10:48 PM IST
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