RBI probe into liquidity crisis

The overnight rates opened at its previous close of 20-25 per cent. However due to high demand for funds by banks which were short of their CRR requirements saw call rates go up to 35 per cent.

According to money market sources, the sudden demand which triggered a hike in call rates is due to a major outflow from the system by the state-run banks. "In the last couple of days, huge amount of funds have flown out of the state-run banks…It is a mystery as we do not know the exact nature of the outflow," said a official from one ofthe primary dealers.

The high call rates saw fall in security prices by 8-10 paise which later recovered when call rates came down to 17-20 per cent. "Lots of forward deals were done in the two most liquid securities in the market–11.40 per cent 2000 paper and 11.55 per cent 2001 paper," said dealers.

The forward premiums across the board eased by 6-8 paise. According to dealers, lot of banks were conducting buy-sell swap by converting their dollar holdings into rupee and covering their short reserve requirement positions on the reporting day. The buy-sell swap in the forex market saw a hike in cash spot by 10 paise to 11 paise from 1 paise earlier.

According to money market dealers, call rates will rule high on Saturday and the yields on securities will go down further. "The situation is likely to stabilise on Monday as Rs 3,000 crore will come into the system through redemption of zero-coupon 1999 paper.

"Banks were offloading gilts, liquidating their portfolio, conducting buy-sell swaps in thespot market in order to have sufficient funds to meet their CRR requirements," said a dealer from a private bank.

According to market dealers, the sudden liquidity crisis has been triggered by the outflow from the system to the tune of Rs 60 crore via the Punjab state loan auction, huge response to the 364-day T-bills auction and Rs 2500 crore outflow through RBI’s open market operation sale. For the 364-day T-bills auction, the RBI received bids worth Rs 1,810 crore out of which it accepted Rs 750 crore. The overnight call rates were seen between 25-30 per cent on Thursday.