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Informist, Friday, Feb. 14, 2025

By Siddhi Chauhan

MUMBAI – The weighted average call rate on Friday rose further above the repo rate of 6.25% as the impact of the Reserve Bank of India's massive dollar sales this week continued to widen the rupee liquidity deficit in the banking system, dealers said. While the call rate for three-day loans ended at 5.80% on Friday as demand for funds waned at the end of trade, the weighted average call rate was 6.38%, up from 6.34% on Thursday. The weighted average rate in the larger triparty repo market, which includes mutual funds, was 6.32%, marginally higher from 6.31% the previous day.

"Even though there were no major scheduled outflows this week, still we are seeing outflows almost every day due to dollar sales. These outflows are not letting overnight rates cool off," a dealer at a private bank said. "We should also take into account that since today is Friday demand for funds from banks is naturally high."

The Indian central bank has likely sold nearly $20 billion in the spot market this week--draining close to INR 1.75 trillion of rupee liquidity--to prop up the rupee, according to market participants. With the impact of dollar sales on rupee liquidity felt with a lag as the operations are settled on a 'T+2' basis, the amount of funds injected by the RBI widened to INR 2.42 trillion on Thursday from INR 697.55 billion on Feb. 6. Dealers, however, said the hit to liquidity has been lower than expected, with the impact of the dollar sales likely mitigated by dollar/rupee buy/sell swaps.

Some bankers also speculated the arbitrage trade between triparty repo and overnight foreign exchange swap market, which had put pressure on money market rates Thursday, could explain the rise in borrowing costs on Friday as well. However, others were not convinced. "On Thursday, the spread between cash-tom and triparty repo market was quite lucrative. But this is not the case today," a dealer at a state-owned bank, said. "Today, banks won't get into this arbitrage because the settlement of cash/tom will be on Monday and US (markets) are shut on Monday." US financial markets will be shut Monday on account of Presidents Day.

Friday, the shortage of rupees in the local market was evident as both the variable repo operations--the daily and 49-day ones--were oversubscribed, with a total of INR 2.25 trillion being borrowed. "Both the auctions saw good demand. Rates were so high that they touched the MSF rate today. This is leading banks to borrow from VRR (variable-rate repo) as funds are available at cheaper rates," a dealer at a state-owned bank said. "The 49-day VRR saw good participation because the funds will help banks when liquidity conditions will be very tight during March."

OUTLOOK

* On Saturday, the two-day call rate may open around the repo rate on demand for funds from banks.

* As is generally the case on working Saturdays, volumes are expected to remain low with banks having fulfilled fund requirements on Friday, dealers said.

* During the day, the call rate is seen in the range of 5.75%-6.25%.

CALL RATE

5.80%--Friday's close for three-day loans

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

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

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Sharply above repo rate as RBI's dollar sales hit 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 further due to central bank's intervention in the foreign exchange market, dealers said. At 0955 IST, the three-day call rate was at 6.45% on Friday against 5.80% for one-day loans on Thursday.

The weighted average call rate at 0930 IST was 6.45% on Friday, against 6.40% at the same time on Thursday. Meanwhile, the weighted average rate in the larger tri-party repo market--which includes mutual funds--was at 6.34% at the same time on Friday, against 6.27% on Thursday.

On Thursday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--rose to INR 2.42 trillion from INR 2.07 trillion on Wednesday. The net liquidity injected widened due to interventions conducted by RBI in the spot market on Tuesday. However, the impact seen on liquidity was still lower than what the market had expected, dealer said.

"It is difficult to say exactly what could have muted the impact of these outflows because no significant inflows were scheduled for Thursday," a dealer at a private bank said. "I am not too sure but possibly, mid-month spending could have hit the system because only two months are left for the government to spend." Some market participants refuted the theory, saying dollar/rupee buy/sell swap operations by the central bank could have limited the outflows significantly. 

The impact of dollar sales worth around $8 billion to $9 billion on Tuesday would be seen in liquidity drain on Thursday as the operations are settled on a 'T+2' basis. The market participants had expected outflow of at least INR 700 billion due to the intervention, dealers said.

The pressure in banking system liquidity was also reflected in elevated money market rates. Apart from tight liquidity, arbitrage trading between triparty repo market and overnight dollar/rupee swap market also led to a rise in money market rates, dealers said. 

As a result, market participants expect the three-day variable rate repo operation to see full subscription, with the RBI likely setting a cut-off rate of 6.27%. The three-day repo operation is being conducted at 1000-1030 IST for a notified amount of INR 1.50 trillion.

The 49-day variable rate repo auction for INR 750.00 billion is also expected to see full subscription. "I think this operation will see good demand because March is a month which is very outflow-heavy," a dealer at a state-owned said. "This is why this banks will be very keen to participate in this auction."

Following are the other highlights:
* Net inflows of INR 154.33 billion are scheduled due to the redemption of Treasury bills and bond coupons

* Reversal of overnight variable rate repo tender will drain INR 2.36 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 Saji George Titus

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