Intelligentguess

Money market lending rates (Overnight and short term) have shot up once again on Friday, after having eased significantly on Thursday.

Rates for clean lending / borrowing hit a high of 70% per annum, while rates for borrowing against collateral have also hit new highs (50% as I write this).

Financial year end considerations seem to be the driving factors. Compounding matters is the fact that this Friday also happens to be a “reporting friday”, a day on which all data is calculated and revealed. Reserve maintenance and other aspects are linked to figures as on the “reporting friday”. Add to it, a bank holiday on the first working day of the new financial year (April 2) means that Friday’s borrowing would need to be made for 4 calendar days. This too has served to drive up rates.

What did come as a small surprise to marketmen was the “rate range” limits imposed by the Clearing Corporation of India (CCIL) for transactions in the CBLO segment (the segment for borrowing / lending against collateral). A price limit of 20% per annum placed, by CCIL, on the transactions came to light only today, since the CBLO rates had never touched these high levels in the past. This fact had not been revealed to the markets in the past.

These limits had ostensibly been imposed to prevent deals at unnaturally high levels due to dealer punching mistakes into the system. A good intent, no doubt, but not congruent with the objective of fair price discovery in a continuous market environment.

To their credit, though, CCIL has increased / removed the range limits as market participants (both lenders and borrowers) complained.

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The Indian Rupee (INR) suffered its sharpest one day fall for more than a decade on Thursday.

At close of local trading in Mumbai, INR fell approx. 1.6% relative to the US Dollar. It closed the trading session at 1 : 43.75 against the greenback. It had closed the previous trading session at  1 : 43.05 to the USD.

This comes after a period of sustained rise witnessed during the month of March. In fact the INR had hit a 7 year high at close on Wednesday.

A chart (Source : Bloomberg) displaying the movement of the currency during the past few months is given below. The chart is in inverted scale (meaning a downmove on the chart reflects weakening USD or strengthening INR and vice versa)

The chart was taken mid session on Thursday and therefore does not reflect the full fall in the value (it stops at 43.42 whereas the actual close was at 43.75)

The primary trigger for the sudden move came from easing money rates. Inter bank overnight money rates eased to single digits (9%) after having hit a high of 30% in the previous trading session.

The initial move in the currency (pictured above) during the morning trading session therefore came from banks who rushed in to cover their short dollar positions, as rupee resources became abundant (possibly as a consequence of government spending finding its way into the banking system). This is corroborated by the fact that the forward premia moved in the opposite direction to the spot rate, confirming suspicions of short covering.

The afternoon trading session was characterised by possible intervention by the central bank. RBI which had been keeping away from the fx markets (very unlike them) for the past couple of weeks is rumored to have intervened (back to their old ways) in the marketplace today buying dollars and therefore amplifying the fall in the value of the local currency.

Software exporters sitting in their naturally cool offices in places like Bangalore must be heaving a sigh of relief. 

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