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Informist, Tuesday, Mar. 4, 2025

By Kabir Sharma

MUMBAI – The continued narrowing of systemtic liquidity deficit helped drag down the weighted average rate in the triparty repo market to under 6.00% on Tuesday, although borrowing costs in the smaller call market stayed above the policy repo rate of 6.25%.

"It (call) is an unsecured market and it's very easy to get funds there, so banks who are short of securities and in urgent need are borrowing from there. They don't mind paying 10-15 basis points extra because the amount is not that large in call deals," a dealer at a state-owned bank said. "What actually matters is TREPS rates and they have come down since last week, so no one is really concerned about call rates." 

On Tuesday, the weighted average call rate edged down 5 bps at 6.27%, while weighted average rate in the larger triparty repo market--which counts mutual funds as participants--was 11 bps lower from Monday at 5.93%. As per latest data from the Reserve Bank of India, the net liquidity injected by the central bank--a proxy for the systemic liquidity deficit--had fallen to INR 1.10 trillion on Monday from INR 1.61 trillion Friday, aided by the central government's month-end spending. The liquidity deficit narrowed further on Tuesday--data that will be released by RBI on Wednesday will likely reflect the same--following the settlement of the RBI's $10.06-billion dollar/rupee buy/sell swap auction conducted on Friday.

"Currently, banking system liquidity is around -INR 1 trillion (deficit); however, the first leg of the $10 billion Buy-Sell swap will settle today (Tuesday), injecting approximately INR 870 billion of liquidity into the system. Furthermore, potential government spending means we could enter a small surplus in the banking system, which we have not seen since December," Nathan Sribalasundaram, a rates strategist at Nomura, said in a note on Tuesday.

Dealers, however, are not sure how much liquidity will actually be injected from the swap auction settlement. "There is a lot of ambiguity around the number. Some banks are saying 60% is rollover, some are saying just 40%. So we will get to know the exact amount only tomorrow (Wednesday)," a dealer at a private bank said.

In a sign of continued easing of liquidity conditions, Tuesday's variable rate repo auction for INR 250.00 billion only saw bids worth INR 58.55 billion. However, traders expect liquidity pressures to rise later this week once payments for tax deducted at source and excise duty begin. The liquidity deficit is seen widening further next week following advance tax payments.

OUTLOOK

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

* During the day, the call rate is seen in a range of 5.75-6.40% and the triparty repo rate is seen in the range of 5.75-6.25%. 

* On Wednesday, the RBI will conduct an overnight variable rate repo auction for INR 250 billion at 1000-1030 IST.

CALL RATE

5.75%--Tuesday's close for one-day loans

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

5.75%--Monday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Above repo rate due to demand for funds in early trade

MUMBAI – The interbank call money rate was above the Reserve Bank of India's repo rate of 6.25% on Tuesday due to demand for funds in early trade for cash reserve requirements, dealers said. At 0910 IST, the one-day call rate was at 6.40%, against the close of 5.75% on Monday. Traders expect money market rates to ease later in the day owing to an improvement in liquidity conditions and scheduled inflows from the settlement of the dollar/rupee buy/sell swap worth $10 billion conducted by the RBI on Friday. 

The weighted average call money rate was 6.32% at 0915 IST. Meanwhile, the weighted average rate in the larger tri-party repo market--which includes mutual funds--was 6.10%. 

On Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit—eased slightly to INR 1.10 trillion from INR 1.18 trillion on Sunday, RBI data showed. Traders expect the deficit to ease further owing to inflows from the RBI's dollar/rupee buy/sell swap auction, which is expected at around INR 850 billion. 

As the liquidity deficit has reduced and money market rates are also expected to ease during the day, dealers expect the overnight variable rate repo auction to be undersubscribed. Post market hours on Monday, the RBI announced an INR 250-billion variable rate repo auction. Dealers expect the auction to receive 50% bids and expect the cut-off rate to be 6.26%. 

"The triparty rates are trading below repo rate, and there is no urgent requirement of funds from banks as you can see from the increased amount parked at SDF (standing deposit facility), so the VRR auction might not be that aggressively participated," a dealer at a state-owned bank said. Banks increased the funds parked under the standing deposit facility to INR 1.49 trillion on Monday from INR 1.23 trillion on Sunday, RBI data showed. "It is also the start of the month, which usually means that banks do not have any significant outflows for now," the dealer added.

However, traders expect liquidity to be under pressure again once outflows commence from Friday for tax deducted at source and excise duty payments. From Mar. 15, outflows for advance tax payments will also begin, which is expected to drain out around INR 1.00 trillion to INR 1.50 trillion from the banking system, dealers said. 

As per prudential norms, banks have to maintain a cash reserve ratio with the central bank averaged across the fortnight. For the fortnight ending Friday, banks are mandated to maintain an average cash balance of INR 9.23 trillion with the RBI. On Monday, the cash balance maintained by banks was at INR 9.04 trillion, against INR 9.33 trillion on Sunday.

Following are the other highlights:

* Reversal of an overnight variable rate repo tender will drain INR 165.57 billion from the banking system.

* During the day, the call rate is seen in a range of 5.75-6.40%. (Vidhushi RajPurohit)

End

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

Edited by Tanima Banerjee

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