Cash rates inch up on tax outflow worries

Cash rates inch up on tax outflow worries

Mumbai: Indian overnight cash rates stayed higher through most of the session on Monday due to concerns liquidity may tighten further this week following advance tax outflows.

The one-day inter-bank cash rate closed little changed at 6.50/60% compared with Friday’s close of 6.55/60% for three-day loans. On Saturday, the call rate for two-day loans ended at 6.50/60% in an illiquid market.

Dealers said rates edged down in late trades as banks borrowed from the central bank’s second repo auction reducing demand in the inter-bank market, but rates had been much higher during the day.

Banks borrowed Rs89,545 crore from the central bank at its morning repo auction on Monday, compared with a total of Rs1.27 trillion from the twin repo auctions on Friday.

Around Rs55,000-60,000 crore will flow out of the banking system by Thursday which could aggravate the liquidity tightness.

Last week, the Reserve Bank of India (RBI) had conducted an open market purchase of government bonds, its second since November, to ease the cash crunch.

The RBI bought Rs10,120 crore out of Rs12,000 crore on offer through the open market operation (OMOs).

“The RBI should conduct more such OMOs, otherwise liquidity condition will worsen this week," said a dealer at a foreign bank. Last week, RBI governor Duvvuri Subbarao said the central bank may take further measures to ease the cash crunch if necessary but declined to elaborate further.

Liquidity has tightened owing to inadequate government spending and large withdrawals of deposits from banks during festivals.

However, the call rate may not shoot sharply above 7% as the central bank’s temporary relaxation of the statutory liquidity ratio is helping banks borrow more from the repo auctions, dealers said.

The weighted average rate in the call money market was higher at 6.72% from Friday’s 6.58%, and that in the collateralized borrowing and lending obligation (CBLO) market was 6.10% versus 6.26%. Volumes in the call market were a heavy Rs10,421 crore, versus Rs11,339 crore on Friday. In CBLO, it was at Rs68,691 crore versus Rs46,651 crore on Friday.