India One-Year Swap Rate Reaches Seven-Week High on Cash Squeeze

India’s one-year interest-rate swaps rose to a seven-week high as a lack of government spending and increased consumer withdrawals in the festival season caused a cash shortage in the banking system.

Lenders borrowed an average of 671 billion rupees ($12.5 billion) a day from the monetary authority’s repurchase window last month, compared with 482 billion rupees in September, central bank data show. Reserve Bank of India Governor Duvvuri Subbarao cut the reserve-requirement ratio for a fourth time this year by 25 basis points to 4.25 percent on Oct. 30 to ease the cash squeeze. The repurchase rate was left at 8 percent.

“Swap rates are inching higher as funds are getting scarce,” said Srinivasa Raghavan, executive vice president of treasury at Dhanlaxmi Bank Ltd. in Mumbai. “Investors are also disappointed as the RBI didn’t cut borrowing costs.”

The fixed payment to lock in one-year borrowing costs rose one basis point, or 0.01 percentage point, to 7.76 percent in Mumbai, according to data compiled by Bloomberg. That’s the highest since Sept. 12.

The “systemic liquidity deficit has been high because of several factors including the wedge between deposit and credit growth, the build-up of the government’s cash balances from mid-September and the drainage of liquidity on account of a festival-related step-up in currency demand,” the RBI said in a statement Oct. 30.

The run-up to Diwali, the Hindu festival of lights to be celebrated next week, is traditionally marked by purchases of gold, houses, apartments and vehicles.

The yield on the benchmark 8.15 percent government bonds due June 2022 fell two basis points to 8.19 percent, according to the central bank’s trading system.