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Informist, Wednesday, Dec. 11, 2024

By Kabir Sharma 

MUMBAI – The interbank call money rate ended at the Reserve Bank of India's marginal standing facility rate of 6.75% Wednesday on high demand for funds from banks as the liquidity tightened on account of the Reserve Bank of India delivering dollars against its outstanding forward contract sales, dealers said. The one-day call money rate ended at 6.75%, against 6.74% on Tuesday. Dealers said the RBI has been delivering dollars against its outstanding forward dollar sales, draining liquidity from the banking system. 

According to data on the RBI's website, the liquidity surplus widened slightly to INR 356.67 billion on Tuesday from INR 233.42 billion on Monday. Dealers said there was panic borrowing in the morning as market participants saw that borrowings from MSF rose to more than INR 80 billion. "There was panic in the morning, people saw high borrowing in MSF which led to some panic borrowing," a dealer at a private bank said. 

Dealers also said the demand at the variable rate auction was also much higher than anticipated because of the sense of panic. "The cut-off and the demand were both higher than what we were seeing, it led to knee-jerk reaction and higher borrowing," a dealer at a state-owned bank said. Owing to the high borrowing from MSF and in order to ease the money market rates, the RBI conducted a two-day variable rate repo operation for a notified amount of INR 250 billion. The auction saw an overwhelming response. 

At the auction, banks placed bids worth INR 628.77 billion, more than double the notified amount. The cut-off was set at 6.64%. Dealers expect the RBI to continue with repo auctions in the coming days to keep money market rates cool. "The liquidity is in a tight position as the inflows from the month-end spending for November has mostly dried out and plus the RBI's selling of dollars is further weighing on surplus," a dealer at another state-owned bank said. "The CRR cut also may not suffice and the surplus will eventually reverse, there will likely be more VRRs in the upcoming days," he said. 

Some market participants were surprised by the cooling rates in tri-party repo given the liquidity in the system. "To be very honest it was a weird day, rates were fluctuating like anything and TREPS fell to 6.24%-6.26% levels amid this kind of liquidity, which was very weird," a dealer at a private bank said. 

Dealers said that they expect rates to remain high as liquidity is expected to slip into deficit despite the CRR cut taking effect, as advance tax outflows starting later this week are likely to drain around INR 1.25 trillion to 1.50 trillion from the banking system. Announcing the outcome of the December Monetary Policy Committee meeting on Friday, then RBI Governor Shaktikanta Das said the cash reserve ratio would be cut by 25 basis points effective from the fortnight starting Dec. 14, and by another 25 bps from the fortnight starting Dec. 28. The move is estimated to increase liquidity in the banking system by INR 1.16 trillion, Das said.

The following are the other highlights:

* The weighted average call rate was 6.70% against 6.67% on Tuesday.

* The weighted average rate for triparty repo was 6.65% as compared to 6.64% on Tuesday.

* Reversal of the standing deposit facility will add INR 733.11 billion to the banking system, while reversal of the marginal standing facility will drain INR 8.26 billion.

OUTLOOK

* On Thursday, the one-day call money rate may open near the RBI's marginal standing facility rate of 6.75% due to demand for funds from banks.

* During the day, the call rate is seen in a range of 6.00-6.80%, dealers said.

CALL RATE

6.75%--Wednesday's close for one-day loans

6.80%--Wednesday's open for one-day loans

6.74%--Tuesday's close for one-day loans

BENCHMARK MIBOR (in per cent)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Deepshikha Bhardwaj

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