This was a turbulent week for the call money market as the call rates touched a high of 17% during this week. The main reason for all this was the reverse repo cut-off rate through which the RBI injects liquidity into the system. During the entire week, the RBI kept its cut-off rate high. Now, the million dollar question is, Why was the RBI keeping its cut-off rate so high? The answer is that it wants the operators to stop using this liquidity support to make directional bets on interest rates like taking positions in the assets. When the call rates were fairly soft, the operators used to borrow short at lower interest rates and park these funds in assets with longer maturity, thereby earning a spread.  Through this measure, the RBI wants to make it a point that this liquidity support should be used to match the temporary liquidity mismatches and not to make any directional bets on the interest rates. But the implications could be very serious.  It will effect the yield curve causing it to move up and if it continues, the prices in the bond markets might go down.

June 23rd, Friday

The call rates closed around 12.5-13.5%, marginally higher than thursday's close. The call rates opened at the same level and soon went down to 11.5% in early trades. But then they firmed up after the RBI announced the results for its reverse repo auction. The cut-off rate was fixed by the RBI at 13.05% and it accepted only bids worth Rs.220 crores and therefore the liquidity conditions remained tight in the market. Dealers quoting higher after the RBI's reverse repo auction results reinforce our belief that the cut-off rate sets the benchmark for call rates.  Due to firmed up call rates, the G-sec prices also eased down. The gilts market sentiment was good in the morning due to low call rates but in the afternoon, when the call rates tightened, the prices of the gilts also fell.

June 22nd, Thursday

Call rates firmed up to close around 12-13% in the call money market on Thursday against their previous close of 11.5-13%. Call rates opened low at 11-12.5% but rose to touch the day's high of 14% following the RBI's reduced liquidity through its reverse repo auction by accepting bids worth Rs. 40 crores only and that too at a higher than expected cut-off rate of 13%.  The market was expecting a lower cut-off rate following wednesday's reduction in the cut-off rate, but the RBI decided to reduce the liquidity support to the market.

June 21st, Wednesday

There was some relief in the call money market with call rates closing around 11.5-13% down from Tuesday's level of 13-15% on Wednesday. The call rates opened at their previous levels of 13-15% but eased to close at 11.5-13% after the RBI injected liquidity into the market through its reverse repo auction. The cut-off rate fixed by the RBI at 13.5% was also lower as compared to Tuesday's rate of 14%.  With most of the advance tax outflows now complete, liquidity has eased and we can expect a further downward movement in call rates in the coming week.  The stabilized and firmed up rupee also added some comfort to the market sentiment. With call rates down and the rupee fairly stabilized, there was some action in the G-secs also. There were purchases made in the G-secs and gilts prices firmed up across all maturities following purchases across all maturities.

June 20th, Tuesday

The call rates closed unchanged at their previous close of 13-15% on Tuesday. Call rates opened high at 17% but came down when the RBI's Liquidity Adjustment facility rate was announced. The RBI was also in action at its reverse repo auction window.  The cut-off rate for Tuesday's auction was fixed at 14%. Some borrowers turned lenders after the announcement of reverse repo results.  This caused the rates to go down but nowhere near the RBI's refinance rate as the reverse repo rate set the floor for call rates.

June 19th, Monday

The call rates ended firm on Monday at 13.50-15% compared to the previous week's close of 10-12% amidst steady demand for funds and tight supplies. The RBI was also into action with its reverse repo auction window open, but the cut-off rate for this auction at 13.50% was too high.  That set the floor for the call rates.  Some of the operators, who didn't get the money in this auction, had to go to the call money market to cover their positions and this pushed the call rates northwards. The rate at which the RBI supplies liquidity to the market sets a floor, on the basis of which all the other interest rates in the economy are determined.  Lenders are taking a cue from the reverse repo cut-off rate and fixing their lending rates keeping it as a benchmark, in the past two weeks.  That's why the call rates were higher on Monday.   In the G-secs market, the prices of medium and long term bonds also fell because of these higher rates.

Rajneesh Mittal