Call rates have fallen to absurd levels of 0.10% which means banks are lending to each other almost free. This is an indication of how much surplus liquidity is sloshing in the economy. RBI has placed a cap of Rs.3000 crore cap on the amount that the banks can place with RBI on repo – this effectively means that even RBI is scared of being saddled with the huge liquidity at the disposal of the banks. However this situation seems paradoxical – on the one hand you have so much of liquidity in the system while on the other hands interest rates on lending rule between the 12-14% band.

RBI has announced auction of dated securities of Rs.9000 crores and the cap on the repo would force the bank to subscribe to these bonds if call rates continue to rule at these absurd japanese levels.So this excess liquidity could be a temporary phenomena – however this raises questions on other issues – If call rates were ruling at such levels banks should be making a beehive to purchase government securities to take advantage of arbitrage opportunity provided by the rate differential – Imagine borrowing Rs.100 at 0.01% and investing it in a security which will give a 7.39%. However this has not happened which indicates that the banks are not comfortable investing in government securities at this point of time and would rather lend in call at almost free of cost.

Sharp and fleetfooted corporates would look to take advantage of this opportunity to issue short term corporate papers like CPs etc. However there might be reluctance on the part of the banks to subscribe to these issue as at the back of mind every one knows that these kind of interest levels are only short term phenomena.

This high liquidity scenario can be attributed to a couple of reasons: a redemption of a bond infused Rs.20000 crores into the system. Moreover in a bid to support the rupee the RBI has continuously been buying dollars and hence pumping rupee into the system. Rupee has touched an alltime high of Rs.40.28 and seems likely to breach this also…. Overall …. Interesting times ahead — keep watching this space

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