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Short term rates may be pushed up due to the tight year end liquidity



The limited borrowing access from the Reserve Bank of India and secondly the companies paying advance tax will make the short term rates to shoot up in the coming next few days because the system may fall short of the funds . Earlier in the march 2013 the banks could borrow as much as they needed from the RBI through the repo option, but this borrowing was later capped at 0.5% of the total deposits and that works out to b e around Rs- 35,000 crores.RBI lends short term funds to the banks at 8 % under repo. At this point if the government does not spend when the above tax payments are made then there may be more liquidity tightness towards the March end.

And on the other hand earlier year end when the repo borrowing was unlimited the call rates were about 14 % from 8.10 %. Usually banks level and borrow overnight from the inter bank call money market to meet their short term requirements of the funds. So now the overnight call rates may rise to 14 % to 16 %  from the current 8.17 % as nearly Rs 40,000 cr may move out of the system on account of advance payments . So by assuring sufficient liquidity the central banks have been proactive in the past two quarters. Due to the underscoring anticipated tightening in the liquidity conditions due to the advance tax payments by the corporate .So RBI had made it clear that RBI would conduct term repo auctions of appropriate amount during march 2014 .

Now the outstanding term repo balance currently stands at around Rs - 89,000 crore at 8.9% , RBI also conducted two weeks term repo on Feb. 21 to pump Rs-39,000 crore at 8.19 % , and also announced a fresh repo auction on this Tuesday for Rs- 50,000 crore . More over the central banks also conducted (OMO) open market operation by buying back government securities for Rs-10,000 crores on Jan 22 . Now the liquidity will be tight going forward, but RBI would not let it go worse. Banks and SLR securities can borrow for term repos while the marginal standing facility would also provide liquidity. If call rates rise to 14 % to 15% level than it will also bounce back to 8.50 % to 9 % ultimately.