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Informist, Thursday, Feb. 13, 2025

By Kabir Sharma

MUMBAI – The weighted average call rate was above the repo rate of 6.25% on Thursday as traders used an arbitrage opportunity to borrow from the money market and lend in the overnight foreign exchange swap market, dealers said. The weighted average call rate was 6.34% Thursday as against 6.29% Wednesday, while the one-day call rate ended at 5.80% as demand for funds waned towards the close of trade.

"Market was prompted to jump on the arbitrage as cash-tom swap rate in the foreign exchange market was trading near 3.36%, which, when added to the SOFR (Secured Overnight Financing Rate) of 4.33%, goes to around 7.70%, significantly higher than money market rates," a dealer at a state-owned bank said.

The dollar/rupee overnight swap rate, or cash-tom, surged on Thursday following the Reserve Bank of India's massive dollar sales this week, which led to a surplus of dollars. According to dealers, the RBI sold nearly $15 billion in total in the spot market in the first couple of days of the week. The resultant impact on rupee liquidity was felt only starting Wednesday as the operations are settled on a 'T+2' basis.

On an annualised basis, the dollar/rupee cash-tom rate rose to 6.30% earlier in the day on Thursday before settling at 2.94% at 1530 IST as against 4.20% Wednesday.

Like in the call market, traders also took advantage of the arbitrage opportunity in the triparty repo segment, with the weighted average rate rising to 6.31% on Thursday from 6.26% Wednesday.

The RBI's heavy dollar sales as the rupee approached the 88-per-dollar mark on Monday have further tightened liquidity conditions, with money market rates elevated despite the infusion of INR 2.36 trillion on Thursday through the overnight variable repo rate auction. On Wednesday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was INR 2.07 trillion, up from INR 1.91 trillion Tuesday.

Friday's 49-day variable rate repo auction for INR 750.00 billion is expected to see full subscription. However, the operation will reverse on Apr. 4--the same day as last week's 56-day tender--which might make some banks think twice before bidding as it would lead to a large outflow on the same day, dealers said.

OUTLOOK

* On Friday, the three-day call money rate may open above the RBI's repo rate of 6.25% due to demand for funds from banks early in the day to meet reserve requirements. During the day, the call rate is seen in the range of 5.75-6.40%, dealers said.

* The RBI will conduct a three-day variable rate repo auction for INR 1.50 trillion from 1000-1030 IST.

CALL RATE

5.80%--Thursday's close for one-day loans

6.40%--Thursday's open for one-day loans

5.50%--Wednesday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Above repo rate as RBI's dlr sales exert pressure on liquidity

MUMBAI – The interbank call money rate was above the Reserve Bank of India's repo rate of 6.25% due to demand for funds from banks as the liquidity deficit widened due to central bank's foreign exchange intervention, dealers said. At 0930 IST, the one-day call rate was at 6.40% on Thursday against 5.50% at close on Wednesday. 

The weighted average call rate at 0930 IST was unchanged from Wednesday's level of 6.40% at the same time. Meanwhile, the weighted average rate in the larger tri-party repo market--which includes mutual funds--was 6.27% at the same time on Thursday compared to 6.24% on Wednesday. On Wednesday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--rose to INR 2.07 trillion against INR 1.91 trillion on Tuesday.

The net liquidity injected rose slighlty as the impact of RBI's intervention in the foreign exchange market conducted on Monday was seen on the banking system liquidity, dealers said. However, the rise in deficit was limited as the central bank sterilised the liquidity impact through dollar/rupee buy/sell swaps, dealers said. Forex dealers peg the amount of dollar sales in the spot market conducted on Monday to be around $5 billion.

The impact of interventions was also seen as banks withdrew the funds parked under standing deposit facility with the central bank on Wednesday, dealers said. As per RBI data, on Wednesday banks drew down funds parked under standing deposit facility to INR 481.10 billion against INR 714.34 billion on Tuesday.  

"Even though the impact of intervention is not quite sharp when you look at the deficit, but you should also see that the SDF has fallen more than INR 200 billion. This will give you a clearer idea," a dealer at a private bank said. "Some of the impact of interventions have also been mitigated by (dollar/rupee) buy/sell swap conducted by RBI on the same day itself." 

The RBI has been heavily selling dollars in the foreign exchange market to support the rupee, which has been under severe depreciation pressure because of global market volatility, dealers said. The central bank is estimated to have sold over $15 billion in the domestic spot market on Monday and Tuesday, which would translate to a liquidity drain of around INR 1.3 trillion, dealers said. The buy/sell forward operations have only been a fraction of that quantum. Consequently, the impact would be seen in liquidity drain starting Wednesday, with further tightness expected Thursday as the operations are settled on a 'T+2' basis. 

During the day, the RBI will conduct an overnight variable rate repo operation, which will be held at 1000-1030 IST for a notified amount of INR 2.75 trillion. In the light of significant outflows due during the day owing to settlement of dollar sales conducted on Tuesday, market participants expect the auction to see atleast 80% subscription with the cental bank likely setting the cut-off rate at 6.26%, dealers said. 

"The RBI has announced such a high quantum for VRR because they are aware that its intervention could strain the liquidity significantly at a time when deficit is already high," a dealer at a state-owned bank said. "This is why I feel that the auction will see good demand." 

Following are the other highlights:
* Net outflows of INR 111.82 billion are scheduled, largely due to payment for Treasury bills. 

* Reversal of overnight variable rate repo tender will drain INR 1.94 trillion from the banking system.

* During the day, the call rate is seen in a range of 5.75-6.45%. (Siddhi Chauhan) End

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

Edited by Ashish Shirke

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