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Informist, Friday, Feb. 7, 2025

By Kabir Sharma

MUMBAI - The interbank call money rate ended below the new Standing Deposit Facility rate of 6.00% on Friday as banks had met their demand for funds earlier in the day, dealers said. While borrowing rates were high in the first hour of trade, they fell across tenures after the Reserve Bank of India at 1000 IST announced a 25-basis-point cut in its policy repo rate to 6.25%. Consequently, the Standing Deposit Facility rate was adjusted downwards by 25 bps to 6.00%.

The three-day call money rate ended at 5.75% on Friday, down from 6.25% Thursday, with the weighted average rate also declining to 6.26% from 6.45%. However, the weighted average rate in the larger tri-party repo market--which includes mutual funds--was litte changed at 6.26%.

"Obviously, the rates fell after the cut, but still remained on the higher side as they (RBI) did not announce any further liquidity measures," a dealer at a state-owned bank said. "Market was expecting another CRR (Cash Reserve Ratio) cut or possibly hints on further rate cuts, but it did not happen."

While the MPC unanimously voted to lower the policy repo rate on Friday after leaving it unchanged for two full years, the RBI was silent on further measures to improve liquidity conditions. On Thursday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--rose to INR 697.55 billion from INR 450.06 billion Wednesday, although the figure is sharply lower from that in the second half of January, thanks to the central bank's actions.

Dealers said the liquidity deficit further widened slightly on Friday as banks increased cash maintained with the central bank due to it being a reporting Friday. Banks borrowed a total of INR 1.83 trillion on Friday from the two variable rate repo auctions. The 56-day tender saw heavy bidding, with the central bank setting the cut-off rate at 6.31%.

"The demand at the second VRR was not a surprise because at March-end there will be a crunch for liquidity due to year-end outflows. And now with no guidance on better liquidity going forward, rates are expected to remain high. So it was bound to be oversubscribed," a dealer at another state-owned bank said.

OUTLOOK

* On Monday, the one-day call rate may open above the repo rate due to demand for funds from banks early in the day.

* During the day, the call rate is seen in a range of 5.75-6.35%, dealers said.

* The RBI will conduct an overnight variable rate repo auction for INR 2.25 trillion at 1000-1030 IST.

CALL RATE

5.75%--Friday's close for three-day loans

6.35%--Friday's open for three-day loans

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

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Below repo rate; traders bet on 25-bps rate cut at MPC meet

MUMBAI – The interbank call money rate was below the Reserve Bank of India's repo rate of 6.50% as the market expects a rate cut by the central banks' Monetary Policy Committee at 1000 IST, dealers said. At 0930 IST, the three-day call money rate was at 6.35%, against 6.25% on Thursday's close.

At 0930 IST, the weighted average call rate was at 6.35% against 6.54% around the same time Thursday. The weighted average triparty repo – a larger funding market that includes mutual funds – rate was at 6.15%, against 6.26% on Thursday. The money market rates decreased as market participants expect the RBI's Monetary Policy Committee to lower the repo rate by 25 basis points to 6.25%. This would be the first interest rate cut in nearly five years. Apart from a rate cut, some market participants even expect the committee to change the stance from 'nuetral' to 'withdrawal of accommodation'.

"The RBI has already started to provide liquidity support through various measures. They have done OMO (open market operation) purchases, they are also conducting longer tenure VRRs (variable rate repo auctions_. This is what generally happens with withdrawal of accomodation, they have just not officially said it," a dealer at a primary dealership said. "This is why I feel that along with a rate cut, the stance will also be changed today (Friday). Apart from this, I think they will continue to infuse liquidity using the same measure going forward."

On Thursday, net liquidity injected — a proxy for systemic liquidity deficit – was at INR 697.55 billion against INR 450.06 billion on Wednesday. The liquidity deficit widened slightly as banks increased the cash balance maintained with the central bank as this is a reporting Friday, dealers said. 

As per prudential norms, banks are required to maintain a cash reserve ratio with the central bank averaged across the fortnight. In the fortnight ending Friday, banks are supposed to maintain an average cash balance of INR 9.13 trillion with the RBI. On Thursday, banks had maintained a cash balance of INR 8.95 trillion, up from INR 8.74 trillion on Wednesday, data from RBI showed.

Money market rates and banking system liquidity may see some pressure during the day because of outflows worth INR 400 billion-INR 500 billion for tax deducted at source payments, dealers said. However, the RBI has already taken measures to counter upcoming outflows, with the central bank set to conduct a three-day variable rate repo for INR 1.5 trillion and a 56-day auction for INR 500.00 billion on Friday. Dealers, though, see the 56-day auction being "a bit tricky" as the operation reverses only in April, and it is difficult to assess what liquidity conditions might be like at the start of the next financial year.

Following are the other highlights:

* Net inflows of INR 11.48 billion, largely for coupon on state bonds. 

* Reversal of funds parked at the Standing Deposit Facility will add INR 1.23 trillion to the banking system.

* Reversal of the overnight variable rate repo tender will drain INR 216.74 billion from the banking system.

* Reversal of the 14-day variable rate repo tender will drain INR 1.62 trillion from the banking system.

* During the day, the call rate is seen in a range of 6.00-6.70%. (Siddhi Chauhan)

End

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

Edited by Vandana Hingorani

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