The liquidity situation in the money markets showed some signs of easing on Monday, after sustained intervention by the Reserve Bank of India in the currency markets.
The central bank has been aggressively buying dollars to arrest the appreciation in the value of the rupee. In the process, it is paying out rupees.
Last week, the RBI bought almost $1 billion to prevent the rupee from strengthening beyond Rs 45 to the dollar. Thus, it pumped almost Rs 4,500 crore (Rs 45 billion) into the markets.
As a result, the pressure on the domestic money markets has eased somewhat. While banks had drawn down Rs 16,195 crore (Rs 191.95 billion) from the RBI through the 6 per cent repo window, they needed to draw down only Rs 1,025 crore (Rs 10.25 billion) on Monday.
Banks borrow funds from the RBI in the repo market, where they place securities in return for cash, at the rate of 6 per cent.
With liquidity conditions easing, call money market rates also ended lower at 5.4-5.6 per cent, from 6.4-5 per cent on Friday.
Some market dealers said it was too early to say whether liquidity conditions had eased finally. An announcement of one auction of dated securities could lead to the return of a liquidity crunch in the system, said Parthasarthy Mukherjee, treasury head at UTI Bank.
The RBI has become active in the foreign exchange market after a gap of four months. As per the latest figures released today, the RBI said it had mopped up just $19 million in September.
However, the latest weekly statistical supplement showed that the central bank had mopped up $1 billion last week.
Liquidity conditions are expected to be easy as there are no further outflows expected this week and Rs 2,962.43 crore (Rs 29.624 billion) will flow into the system on account of payments of interest due on securities.