The reduction in the small savings rate has failed to provide any relief to short-term money market rates as banks rush to meet their business targets for the financial year end. As a result, the rates have increased by 25 to 35 basis points in March, bankers said.
On Monday, the overnight rate climbed as high as 8.3 per cent, intraday, before easing to 6 per cent at the close.
“Rates have hardened as liquidity conditions remained tight,” said Ajay Malgunia, Head, Fixed Income, Edelweiss Securities, explaining the reason behind the rise in rates. “There was advance tax outflow in the middle of the month. During quarter-end, banks also try to get more business to increase their balance sheet. Mutual funds also face redemption pressure during this period. In addition, the government goes slow on spending,” Mr. Malgunia said. According to bankers, the shortfall in liquidity in the system is estimated at more than Rs. 2 lakh crore.
“After the government reduced the rates sharply on small savings, it was expected that short-term rates would also come down,” said a treasury official at a large public sector bank, who did not wish to be named. “However, that has not happened. The rates have actually gone up by 25-35 bps.”
According to dealers, the rate on three-month certificates of deposit, which were issued at 7.9 per cent at the start of the month, has moved up to the 8.20-8.25 per cent range.
Short term rates typically rise at the end of a quarter as banks push to grow their balance sheet. Bankers said the liquidity scenario will improve once the new financial year starts.
