Financial institutions borrowed Rs1.3 trillion (Dh86.6 billion) on average per day this year, the most since the Reserve Bank of India started lending through repurchase auctions in 2000. Foreign-exchange reserves have dropped $29 billion (Dh106.6 billion) from a record in September as the central bank bought rupees to stem the 18 per cent slide in the currency over the period.

The shortage of funds is increasing pressure on Governor Duvvuri Subbarao to step up purchases of government notes to support an economy growing at the slowest pace in three years. The central bank bought Rs209 billion of sovereign securities this month, spurring gains of 1.3 per cent for local-currency bonds, the best performance among regional markets monitored by HSBC Holdings Plc.

"The tight liquidity is a reflection of the Reserve Bank's intervention in the currency markets," N.S. Venkatesh, the Mumbai-based head of treasury at state-owned IDBI Bank Ltd., said in an interview. "The central bank will continue to take steps to boost cash in the banking system to help spur growth."

Call rate

The rupee weakened for a fourth consecutive day yesterday, declining 0.5 per cent to 56.40 per dollar. It has slid 9.6 per cent this quarter, compared with a 10.6 per cent slump in Brazil's real and a 7.3 per cent drop in Russia's rouble. The yuan, whose trading range is controlled by the People's Bank of China, has fallen 0.6 per cent.

India's money-supply growth slowed to 13.4 per cent in the year through May 4 from 15.6 per cent in the 12 months through December 30 as foreign-exchange reserves dropped $16.3 billion, central bank data show. The call-money rate, at which lenders borrow from one another overnight, has climbed 46 basis points, or 0.46 percentage point, to 8.26 per cent in the past week. Short-term rates will "stay elevated", Morgan Stanley analysts including Upasana Chachra wrote in a note to clients yesterday.

Gross domestic product in the year ended March probably rose 6.9 per cent, the least since 2009, according to the government's advance estimate before final numbers due next week. Slowing growth and cash shortages will force the central bank to cut banks' reserve requirements for a third time this year when it meets on June 18, according to Mumbai-based IndusInd Bank Ltd.

"The money market is facing a severe liquidity squeeze due to aggressive dollar sales by the RBI," J. Moses Harding, the Mumbai-based executive vice-president at IndusInd, said in an interview on May 22. "A 50 basis point to 75 basis point cut in cash reserve ratio is possible next month."

He predicts the central bank will buy at least Rs1.5 trillion of bonds in the year that began April 1, about 15 per cent more than in the prior 12 months. Standard Chartered Plc, which shares the outlook, predicts policy makers will cut the cash- reserve ratio by 50 basis points to 4.25 per cent in the remainder of the fiscal year after trimming it by 125 basis points so far.

Benchmark sale

The nation's benchmark notes were little changed yesterday, with yields at the lowest level since May 15, after the Reserve Bank said on May 22 it will buy Rs120 billion of securities this week. The yield on the 8.79 per cent bonds due November 2021 was 8.51 per cent, having dropped 17 basis points this month. The difference between the notes and comparable US Treasuries has shrunk 20 basis points from a record high reached in November to 677 basis points.

The government may sell a new 10-year bond in the next two weeks to replace the current benchmark before tapering off purchases from the market, according to ICICI Securities Primary Dealership Ltd.

"The open-market bond purchases are probably more than offsetting the extent of intervention in the currency market," Sandeep Bagla, a Mumbai-based senior vice-president at ICICI Securities Primary Dealership, said in an interview on May 23. "The liquidity deficit will come down and the RBI may pause buying of bonds."

"Bond investors are finding solace" from the central bank's intervention in the currency market, Anoop Verma, a Mumbai-based fixed-income trader at Development Credit Bank, said in an interview yesterday. "Since dollar sales are tightening liquidity, it gives comfort that the central bank will continue to purchase debt."