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Informist, Thursday, Jan. 9, 2025

By Siddhi Chauhan

MUMBAI – The weighted average call rate ended above the Reserve Bank of India's emergency funding rate, or the Marginal Standing Facility rate, of 6.75% as banks rushed to meet their reserve requirement a day ahead of reporting Friday amid tight liquidity conditions, dealers said. The one-day call rate ended at 6.25%, as against Thursday's close of 6.74%. 

The weighted average call rate was 6.83% on Thursday, as against 6.74% on Wednesday. The weighted average triparty repo rate, which represents a larger funding market including mutual funds, rose to 6.75% Thursday from 6.74% Wednesday. 

"Funds injected through variable rate repo operation today (Thursday) was not enough when one has to meet their cash reserve requirements and more than INR 1.5 trillion is scheduled to leave the system on the same day," a dealer at a state-owned bank said. "If you see, cash reserve maintained by the banks in this entire week is quite less." On Friday, the reversal of two variable repo tenders is scheduled to drain INR 1.78 trillion from the banking system.

According to RBI's data, out of 12 days in the current reporting fortnight so far, banks maintained a lower-than-required cash reserve with the central bank on six days. As per RBI's rule, banks are required to maintain an average cash balance with the central bank on a fortnightly basis. In the fortnight ending Jan. 10, banks are supposed to maintain an average cash balance of INR 9.18 trillion with the RBI. On Wednesday, the cash balance maintained by banks stood at INR 8.74 trillion as per RBI data. 

While some banks are already on track to meet their cash balance requirements for the fortnight, a few are still struggling to maintain the required amount due to shortage of funds, dealers said. On Wednesday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 1.82 trillion from INR 1.44 trillion on Tuesday.

Liquidity deficit widened on Wednesday due to payment of excise duty and tax deducted at source which likely drained around INR 200 billion from the banking system. Outflows for payment of state government securities worth INR 195.25 billion auctioned on Tuesday also weighed on liquidity. Apart from that, dollar sales from the central bank added to the cash crunch, dealers said. 

"Given the current state, RBI intervention in the foreign exchange market has become a constant right now. This will continue to weigh on liquidity," a dealer at a private bank said. "Today there was a buy/sell swap maturity which they decided to rollover. It won't have much impact on liquidity, but this was the reason why everyone was borrowing aggressively, keeping money market rates high.

Going forward, dealers expect money market rates to trade near the Marginal Standing Facility rate, although the RBI is likely to curtail the rise by conducting repo operations. On Thursday, the central bank announced a 14-day variable rate repo operation for a notified amount of INR 2.25 trillion. The auction will conducted at 1030-1100 IST on Friday. This was an expected and welcome move by the market participants, who were hoping the central bank to conduct a 14-day repo operation for atleast INR 2 trillion.  
 

The following are the other highlights:

* Reversal of funds parked at the Standing Deposit Facility added INR 489.37 billion to the banking system.

* Reversal of funds borrowed at the Marginal Standing Facility took out INR 446.52 billion from the banking system.

OUTLOOK

* On Friday, the three-day call rate may open above the repo rate of 6.50% on demand for funds from banks.
* During the day, the call rate is seen in a range of 6.00-6.90%, dealers said.

CALL RATE

6.25%--Thursday's close for one-day loans

7.00%--Thursday's open for one-day loans

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

BENCHMARK MIBOR (in per cent)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Sharply above MSF rate as systemic liquidity tightens further

MUMBAI – The interbank call money rate was above the Reserve Bank of India's Marginal Standing Facility rate of 6.75% due to demand for funds from banks in early trade. At 1011 IST, the one-day call money rate was at 7.00%, against 6.74% at the close on Wednesday. On Wednesday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 1.82 trillion from INR 1.44 trillion on Tuesday.

The liquidity crunch also pushed in the weighted average call rate to 6.99% on Thursday against 6.74% on Wednesday. The weighted average triparty repo rate also rose to 6.75% against 6.74% on the previous day.

Liquidity remained under pressure due to payment of excise duty and tax deducted at source to the government, which likely drained around INR 700 billion out of the system this week dealers said. However, the impact of these outflows was minimal as only INR 200 billion left the banking system on Wednesday for these outflows, dealers said. 

"I think that there is more to it (liquidity crunch) than just excise duty outflows," a dealer at a state-owned bank said. "The liquidity is under pressure due to (RBI) intervention on the forex (foreign exchange) side. The RBI has been constantly selling dollars in spot. They did so yesterday as well, the impact of which is being shown in the current data."  

In order to meet the requirement of funds, banks reduced the funds parked under the Standing Deposit Facility by nearly INR 180 billion on Wednesday. On Tuesday, the Standing Deposit Facility was at INR 666.30 billion, as per RBI data. With overnight funding rates in both call and triparty repo near the MSF rate on Wednesday, banks also resorted to borrowing from the RBI's MSF window.

As overnight rates remained high, the central bank conducted an overnight rate repo operation at 1000-1030 IST. Market participants expect the auction to be oversubscribed with a cut-off ranging from 6.55-6.65%, according to an Informist poll. Money market rates may fall below the MSF rate after the auction, but would not ease substantially, dealers said. 

"Mutual funds are all struggling for cash, so there is barely any liquidity support in the market," a dealer at a private bank said. "Such a small VRR will also not do a lot to bring rates down. I think we will remain close to the MSF (rate) only."

Following are the other highlights:
* Reversal of funds parked at the Standing Deposit Facility will add INR 489.37 billion to the banking system, while the reversal of Marginal Standing Facility loans will drain INR 446.52 billion
* During the day, the call rate is seen in a range of 6.20-6.90%. (Siddhi Chauhan)

End

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

Edited by Deepshikha Bhardwaj

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