Liquidity condition in the system has tightened with banks borrowing heavily from the Reserve Bank of India (RBI) through its repo window. The dry up of liquidity from the system was mainly triggered by the Rs 68,000 crore payments made by telecom companies to government to acquire bandwidth for third generation (3G) mobile telecom licenses. Liquidity conditions are likely to improve as government starts spending money that it has received from the telecom companies.
Banks borrowed slightly over Rs 13,000 crore on Tuesday from the apex bank, more than double the amount borrowed on Monday. Banks borrowed Rs 5,840 crore through the repo window in the morning and Rs 7,325 crore in the second half on Tuesday.
The tight liquidity condition has limited the scope of arbitrage between money markets and mutual funds for banks, which was rampant earlier. Earlier, banks were parking huge funds in mutual funds, which were in turn lending such funds in the CBLO (Collateralized Borrowing and Lending Obligations) market. However, with the liquidity condition getting tighter, banks are no longer parking money with mutual funds and the later therefore have almost stopped lending through the CBLO facility.
Currently, attractive interest rates in call money markets is enticing the banks to park their surplus funds there. Call rates have surpassed the repo rate of 5.25% during trade in the first two days of the week. Some banks are even investing surplus money in the commercial papers and certificate of deposits where interest rates have hardened.