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Informist, Friday, Feb. 28, 2025

By Kabir Sharma

MUMBAI – The weighted average call rate surged above the Reserve Bank of India's repo rate of 6.25% on Friday due to the persistent liquidity deficit, dealers said. The weighted average call rate was 6.38% against 6.31% on Thursday, while the weighted average rate in the larger tri-party repo market, which includes mutual funds, was 6.27% against 6.21% Thursday. The three-day call rate also settled above repo rate at 6.50% on Friday against 5.85% for one-day loans on Thursday.

Despite the tight liquidity conditions, the three-day variable rate repo operation for INR 250 billion was undersubscribed. The auction saw bids worth INR 162.58 billion, which was sharply lower than what market participants had expected. The central bank set the cut-off rate at 6.26%. "It was quite surprising for me to see such low participation. Some participants were expecting the TREPS rate to fall even below SDF (Standing Deposit Facility) rate after auction," a dealer at a private bank said. "If you see before the auction, we went to as low as 6.10%. So no one preferred borrowing at higher rates," the dealer said.

Contrary to expectations, weighted average triparty repo rate rose. "This has happened because it is month end because of which mutual funds are facing redemption pressures," a dealer at a private bank said.

However, these pressures may not continue as inflows from government's month-end spending are expected to add INR 1.2 trillion to INR 1.5 trillion, dealers said. A smaller chunk of the inflows is expected to have taken place during the day, but a significant amount will likely start from Monday, dealers said. The improvement in liquidity conditions is expected to provide relief to the money market rates, dealers said. 

The dollar/rupee buy/sell swap is expected to infuse liquidity to the tune of INR 450 billion into the system. Nearly 50% of the swap is for the rollover of previous contracts, dealers said. The RBI conducted a $10-billion dollar/rupee buy/sell swap auction under which it bought dollars for immediate delivery and sold them for delivery after three years, in order to meet the durable liquidity needs of the system. The payment for these inflows will take place on Mar. 4.

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 funding requirements on Friday, dealers said.

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

CALL RATE

6.50%--Friday's close for three-day loans

6.40%--Friday's open for three-day loans

5.85%--Thursday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Above RBI's repo rate on demand for funds; VRR auction eyed

MUMBAI – The interbank call money rate was above the Reserve Bank of India's repo rate of 6.25% on Friday due to demand for funds from banks in early trade for cash reserve requirements, dealers said. At 0945 IST, the three-day call rate was at 6.40%, against the close of 5.85% for one-day loans on Thursday. 

The weighed average call money rate was at 6.40% at 0930 IST, unchanged compared to the same time on Thursday. Meanwhile, the weighted average rate in the larger tri-party repo market--which includes mutual funds-- was at 6.25%, against 6.26% on Thursday around the same time. 

On Thursday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was at INR 1.81 trillion, against INR 1.96 trillion on Wednesday, as per RBI data. "There were no scheduled outflows for Thursday, so it is difficult to say what really happened because the change in deficit is quite small," a dealer at a state-owned bank said. "We will see a sharp fall in deficit in the coming days as inflows for government's month-end spending is expected to begin from today (Friday)."

As per market participants, inflows for the government's month-end spending are anticipated to bring INR 1.2 trillion to INR 1.5 trillion to the banking system, which should provide some relief for liquidity in the days ahead. The first tranche of inflows is expected to take place during the day, dealers said. 

Money market participants expect money market rates to cool after the result of three-day variable rate repo operation, dealers said. "Till 1030 IST, the weighted average call rate will remain at these levels, once the auction is done, a slight cool-off will be seen," a dealer at a private bank said. "Towards the end, I feel that weighted average call rate will trade somwehere around 6.30%." 

Inflows from the RBI's dollar/rupee buy/sell swap auction, which will be conducted at 1030 IST to 1130 IST, are also expected to aid liquidity conditions in the coming days, dealers said. The RBI will conduct a $10-billion dollar/rupee buy/sell swap auction on Friday, under which it will buy dollars for immediate delivery and sell them for delivery after three years, in order to meet the durable liquidity needs of the system. The swap is expected to infuse liquidity to the tune of INR 450 billion as nearly 50% of the swap is for the rollover of previous contracts, dealers said. The payment for these inflows will take place on Mar. 4. 

At the three-day variable rate repo operation scheduled at 1000-1030 IST, banks and primary dealerships are expected to pick the entire INR 250 billion. The central bank is expected to set a cut-off of 6.26%. 

Following are the other highlights:

* Reversal of overnight variable rate repo tender will drain INR 499.55 billion from the banking system.

* Scheduled net outflows worth INR 340.49 billion largely on account of payment of Treasury bills. 

* During the day, the call rate is seen in a range of 5.75-6.45%.

End

Edited by Ashish Shirke

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