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Surge in bank deposits skews money market

Banks with high deposits forced to buy govt bonds pushing yields down, but others rush to call market pushing rates up.

, ET Bureau|
Mar 07, 2011, 06.49 AM IST
MUMBAI: Surge in bank deposits due to high interest rates may cause divergence in money markets in the coming weeks with call money and government bond markets headed in different directions.

Banks that offered high rates such as Karur Vysya Bank and Canara Bank are flooded with cash, forcing them to buy government bonds for at least a quarter of the fresh deposits, pushing the yields down.

Those private and foreign banks, who were left out of the deposits rush because of their reluctance to compete with state-run banks, are rushing to the call market. That is pushing up rates, since they do not have more than the 24% stipulated government bonds to borrow from RBI's liquidity adjustment facility (LAF).

"There is a shortfall, hence banks are going to the call money market to borrow funds, instead of pledging securities with the central bank," said KV Ramesh, head of treasury, Lakshmi Vilas Bank.

Call money rates touched 6.75-6.85%, reaching 7% in the day on Friday from 6.25% in Mid-February. The average daily borrowing from RBI has fallen from around 60,000 crore to less than 40,000 crore since late January.

The yield on the most-traded 8.08%, 2022 bond closed on Friday at 8.08%, off more than 15 basis points since the recent peak. A basis point is 0.01 percentage point.

Deposits have grown by almost 96,507 crore between January 14 and February 11, data from the central bank shows. However, government bond holding has gone up by only 6,152 crore during the period.

The Reserve Bank of India stipulates that banks have to park 24% of the deposits they raise in government bonds. In addition, they also have to park 6% of the deposits they raise as cash with RBI, which comprises the cash reserve requirement, or CRR. There is an inverse relation with bond prices and yields, and hence, softening of yields implies higher bond prices.

"The yields have come off,"' said AY Shedshale, head of treasury, Bank of Maharashtra. "There are no new issuances also. So the available securities are being traded aggressively. There are banks buying securities to meet their increased SLR. Banks are building their balance sheets."

Bankers say the systemic liquidity is comfortable as the government has started to spend and the pressure would start building up after the second week as advance tax outflows of about 50,000-60,000 crore go out of the system.

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