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Informist, Tuesday, Mar. 18, 2025

By Vidhushi RajPurohit

MUMBAI – Tight liquidity conditions and increased demand for funds from banks to meet their year-end credit disbursal needs kept the interbank borrowing rates elevated on Tuesday, dealers said. After the outflows for corporate advance tax payment over the last few days, the systemic liquidity deficit widened to a nearly two-month high, which led banks to flock to call money market to meet their funding needs.

On Tuesday, the call rate closed at 6.40%. The weighted average call rate was 6.33%, higher than the Reserve Bank of India's repo rate 6.25%. In the larger triparty repo market, the rate was at 6.34%, higher than 6.25% Monday. 

The Reserve Bank of India's net liquidity injected figure rose to INR 2.43 trillion on Monday--the highest since Jan. 29. Dealers expect the figure to widen further in the coming days once the outflows for goods and services tax payments commence Friday. 

Despite the tightened liquidity conditions, traders did not bid aggressively at the RBI's overnight variable rate repo auction for INR 1.50 trillion. Traders borrowed only 50% of the total quantum as they expected the overnight rates to ease later in the day, dealers said. The central bank set the cut-off rate at 6.26%. 

The RBI has been consistent in its measures to support the systemic liquidity through daily variable rate repo auctions since Jan. 16. It has also stepped up to infuse durable liquidity into the banking system through open market operation auctions and dollar/rupee buy/sell swap auctions. 

On Tuesday, RBI conducted the second tranche of open market purchase auctions worth INR 1 trillion it had announced for March. It bought six gilts amounting to INR 500 billion. The settlement of the auction is scheduled for Wednesday. However, the inflows from the OMO buy auction will be offset by the outflow for the INR 526.20 billion state bond auction payment which also due on Wednesday.

Some traders were of the view that the central bank might conduct another purchase auction later in the month taking into account the outflows for goods and services tax payment which is pegged around INR 1.50 trillion to INR 2.00 trillion. Dealers also reasoned that before the RBI goes for another 25 basis points repo rate cut in April, which is widely expected by the market participants, it will need to ensure there is adequate liquidity in the banking system.

"RBI needs to ensure adequate liquidity is there in a system before it can proceed to cut rates and seeing the inflation data it looks like there are high chances of another repo cut," a dealer at a private bank said. "Even in February, RBI did the same as it became proactive to ensure that there is suffiecint funds with banks and then cut the repo rate." India's CPI inflation fell to a seven-month low of 3.61% in February, furthering the hope that the RBI's Monetary Policy Committee can continue with its rate-easing trajectory after delivering a 25-basis-point cut in the repo rate in February.

OUTLOOK

* On Wednesday, the one-day call rate may open above the repo rate as banks will borrow funds to meet their reserve requirements.

* During the day, the call rate is seen in the range of 5.80-6.50% and the triparty repo rate is seen in the range of 5.75-6.40%.

* The RBI will conduct an overnight variable rate repo auction for INR 1.00 trillion at 1000-1030 IST.

CALL RATE

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

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

6.00%--Monday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Above repo rate; liquidity deficit widens ahead of GST outflows 

MUMBAI – The interbank call money rate was above the repo rate of 6.25% on Tuesday as the liquidity deficit in the banking system widened further. At 1005 IST, the one-day call rate had cooled to 6.25% after rising to as high as 6.45% in the first hour of trade. On Monday, the call rate had closed at 6.00%. Meanwhile, the weighted average call rate remained elevated at 6.39% as against 6.34% on Monday. The weighted average rate in the larger triparty repo market was at 6.25%, up from 6.19%.

"The last tranche of advance tax outflows took place yesterday (Monday), the effect of which we are seeing on today's money market rates," a dealer at state-owned bank said. "Looking at the high money market rates, it seems that participation at today's (Tuesday) VRR (variable rate repo) is going to be aggressive." The Reserve Bank of India will conduct an overnight variable rate repo operation for INR 1.50 trillion.

The widening of the liquidity deficit was reflected in the RBI's net liquidity injected figure, which rose to INR 2.43 trillion on Monday--the highest since Jan. 29. In the coming days, outflows for goods and services tax payments will weigh on liquidity, dealers said, although the infusion of durable liquidity by the RBI will check the upward pressure on borrowing rates. The central bank will purchase INR 500.00 billion of government bonds through an open market auction on Tuesday. Next week, on Monday, the RBI will hold a dollar/rupee buy/sell swap auction for $10 billion.

"Towards year end we expect the general government spending will need to be ramped up heavily to meet budgeted estimates. We expect overnight rates to remain in check as liquidity conditions will be supported by RBI's measures including VRRs. Overall, we expect the durable liquidity to be in surplus in the near term," Kotak Mahindra Bank's analysts said in a note Monday. "We note the heavy short forward book of RBI is expected to strain liquidity on maturity (without rollovers), thereby warranting continued rollovers through FX swaps. Further, structural liquidity deficit from currency leakage and CRR (Cash Reserve Ratio) build-up in 2025-26 (Apr-Mar) will necessitate aggressive liquidity easing measures like OMO purchases and LTROs (long-term repo operations) in order to ensure smooth monetary transmission," they added.  End

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

Edited by Akul Nishant Akhoury

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