The one-month overnight indexed swap hovered near a more than five-month high of 9.47 per cent on Tuesday, up from 8.49 per cent on February 26. The three-month certificate of deposit was trading at 10.25 per cent, up from 9.10 per cent in January.
Meanwhile, month-end rupee forward contracts surged to about 17 per cent on Tuesday compared with around 9 per cent last month, reflecting a spike in the overnight benchmark known as Mumbai Interbank Offered Rate (MIBOR)
Spikes in short-term rates are typical towards the end of fiscal years in India. Banks abstain from lending in interbank money markets on the last day because of a domestic accounting rule that mandates capital adequacy ratios for the following year be set based on the funds disclosed on that date.
The last day of the fiscal year in 2013-14 falls on Monday, which coincides with Gudi Padwa and is a local holiday for Mumbai, effectively meaning the last day from an accounting point of view is on Friday, March 28.
The problem is more to do with the rule on capital charge than liquidity because no bank wants to lend uncollateralised even if they have excess cash.
The lack of lending at the end of fiscal years has long led to volatility, as banks needing cash at the end of the year act early, knowing funds will dry up as March progresses.
That can have a knock-on impact across short-term interest rates.
Based on the spike in currency forwards, analysts predict MIBOR could climb to around 15 per cent by the end of the month from near 8 per cent currently.
The call rate also tends to spike towards the end of the fiscal year, even when the Reserve Bank of India injects liquidity via repo transactions. Last year, for example, the call rate rose to 16 per cent on March 28, the last day of 2012-13.
It is a nightmare for those who need to borrow on the last day and also for those who don't. Because all the products linked to MIBOR go up.