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Informist, Friday, Dec. 27, 2024

By Siddhi Chauhan

MUMBAI – The interbank call money rate ended above the Reserve Bank of India's marginal standing facility rate of 6.75% on Friday owing to the demand for funds from banks amidst a liquidity deficit in the banking system, dealers said. The three-day call money rate ended at 6.80%, against 6.65% for one-day loans on Thursday.

According to Reserve Bank of India data, the liquidity deficit in the system was at INR 1.89 trillion on Thursday against INR 2.12 trillion on Wednesday. The fall in liquidity deficit was attributed to inflows for government month-end spending, which added around INR 1 trillion to the banking system over a period of three working days, dealers said. Financial markets were shut on Wednesday due to Christmas. 

"The deficit narrowed due to inflows of government month-end spending which probably would have added around INR 500 billion on Thursday," a dealer at a state-owned bank said. "However, its impact was limited due to outflows of around INR 300 billion for state government security auction." On Thursday, payment of state government security drained INR 306 billion from the banking system.

On Friday, the RBI conducted two variable rate repo operations in order to ease system liquidity and to reduce pressure on money market rates. At 1000-1030 IST, RBI conducted a 14-day variable rate repo auction for INR 1.50 trillion, which saw bids only for INR 1.28 trillion, which were accepted by RBI at a cut-off rate of 6.51%. Banks were not interested in parking funds heavily due to the fortnightly tenure of the operation, dealers said.

Later in the day, the central bank announced a four-day variable repo rate auction for a notified amount of INR 1.25 trillion. At the auction, banks borrowed INR 852.47 billion at a cut-off rate of 6.51%. 

"If you are under the impression that the (money market) rates are expected to fall in coming days, then why would you borrow at a higher rate that too towards the month-end?", a dealer at a state-owned bank said. "The rates are expected to fall due to inflows from second tranche of CRR (cash reserve ratio) cut and month-end spending."  

The second tranche of the cut in cash reserve ratio to 4.00% of the net demand and time liabilities is effective from Saturday. Dealers expect around INR 700 billion to be released from the cut. 

Despite the repo operations, the weighted average triparty repo rate for the day was at the marginal standing facility rate of 6.75%, against 6.44% on Thursday. The spike in rates was attributed to lending activity increasing at the quarter-end and year-end, and funds to meet the cash reserve requirements, dealers said.

"State-owned banks still have the window to borrow through marginal standing facility, but private banks don't (prefer) that. This is why we are resorting to borrowing funds through triparty repo rates," a dealer at a private bank said. "Credit outflows, which have started from today (Friday), will drain INR 1 trillion and then many banks would have maintained a lower cash balance, so they are trying to cover it up by borrowing today."

The following are the other highlights:

* The weighted average call rate was 6.77%, against 6.67% on Thursday.

* The weighted average rate for triparty repo was 6.75%, against 6.44% on Thursday.

* Reversal of the standing deposit facility added INR 1.19 trillion to the banking system, and reversal of the marginal standing facility drained INR 9.13 billion.

OUTLOOK

* Money markets are shut on Saturday. On Monday, the one-day call money rate may open above the repo rate of 6.50% due to the 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

6.80%--Friday's close for three-day loans

6.75%--Friday's open for three-day loans

6.65%--Thursday's close for one-day loans

BENCHMARK MIBOR (in per cent)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: At RBI's MSF rate even as liquidity improves on govt spending

MUMBAI – The interbank call money rate opened at the Reserve Bank of India's marginal standing facility rate of 6.75%, despite liquidity conditions improving slightly, as outflows for reversal of variable rate repo auctions are expected to weigh on the systemic liquidity, dealers said. "VRR outflows will drain a lot of money today (Friday), even with the spending kicking in today (Friday)," a dealer at a state-owned bank said. The three-day call rate opened at 6.75%, against Thursday's close of 6.65% for one-day loans. 

According to data on the Reserve Bank of India's website, the liquidity deficit was at INR 1.89 trillion on Thursday, slightly better than INR 2.12 trillion on Wednesday. Dealers said liquidity improved on account of the government's month-end spending. "The salary payment from the government has come, around INR 500 billion-INR 600 billion has happened, but more will happen today (Friday) and tomorrow (Saturday)," a dealer at another state-owned bank said. 

Dealers said the reversal of four variable rate repo auctions on Friday is scheduled to drain liquidity to the tune of INR 2.99 trillion from the banking system. However, the RBI is scheduled to conduct a 14-day variable rate repo auction for INR 1.50 trillion at 1030-1100 IST, which is not expected to see full subscription due to its long tenure, according to dealers. "I don't think that the 14-day variable repo operation will get fully subscribed because of duration. If the rates don't come down after the auction, the RBI may conduct an overnight rate repo operation," a dealer at a state-owned bank said.

The second 25-basis-point cut to the cash reserve ratio of banks comes into effect this weekend, which is also expected to improve liquidity in the banking system, dealers said. The RBI cut the cash reserve ratio of banks by 25 bps, effective from the fortnight starting Dec. 14, and will cut by another 25 bps from the fortnight starting Saturday, bringing it to 4% of banks' net demand and time liabilities. The RBI estimates the move to increase liquidity in the banking system by INR 1.16 trillion.

Following are the other highlights:

* The weighted average call rate was 6.90%, against 6.67% on Thursday.

* The weighted average rate for triparty repo was 6.68%, against 6.44% on Thursday.

* Reversal of the standing deposit facility will add INR 1.19 trillion to the banking system, and reversal of the marginal standing facility will drain INR 9.13 billion.

* During the day, the call rate is seen in a range of 6.00-6.95%. (Kabir Sharma)

End

Edited by Saji George Titus

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