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Informist, Wednesday, May 7, 2025

By Siddhi Chauhan

MUMBAI – The interbank call money rate for one-day money ended below the Reserve Bank of India's repo rate of 6.00% Wednesday because of comfortable liquidity, dealers said. Despite low money market rates, the overall market volume remained high, possibly because of panic borrowing in early trade amid escalation of the conflict between India and Pakistan, they said. Some market participants borrowed in advance to avoid disruptions during civil defence mock drills which were held at 1600 IST in Mumbai, dealers said. 

The one-day call money rate closed at 5.50% Wednesday, with the weighted average rate at 5.83%. The call rate moved in the range of 4.90-5.95%. The trade volume for one-day call was INR 156.48 billion, slightly down from INR 187.82 billion Tuesday. The total money market volume, including tri-party repos, was INR 5.97 trillion, slightly down from INR 6.11 trillion Tuesday. Meanwhile, the tri-party repo rate moved in a range of 5.50-5.90%, closing at 5.73%.

Some market participants denied the high volumes were an outcome of panic borrowing. "I think it is just usual borrowing driven mostly by primary dealerships and small finance banks," a dealer at a state-owned bank said. "There are little chances of disruptions in trading because we have another optional trading location which has been set up across domestic markets, so if anything goes wrong at the main location we have a backup." 

However, a dealer at another state-owned bank said, "The rates did not go quite high throughout the day, which indicates that most banks have comfortable liquidity. The volumes are high today (Wednesday) possibly because of panic borrowing. Some banks would have borrowed ahead of the mock drill which is scheduled for today."

On Tuesday, the government decided to conduct civil defence mock drills across 244 categorised civil defence districts Wednesday to check preparedness for potential hostile attacks. The directive from the home ministry came amid escalating tensions with Pakistan following the Apr. 22 terrorist attack in Pahalgam in which 26 people were killed. In retaliation, Indian armed forces launched a military operation early Wednesday at nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating, the defence ministry said in a statement early in the morning.

The government press briefing after the military operation did not trigger any negative sentiment in the money market, dealers said. "People were very closely tracking the press conference, but nothing really came of it," a dealer at a state-owned bank said. "The communication from the officials was balanced, they just told what they (India) have done. We were expecting more details like what will be Pakistan's next move."

Money market rates, including both call rate and tri-party repo rates, were traded below the RBI's repo rate throughout the day. Low borrowing costs in the first half of trade dampened demand at the overnight variable rate repo with the RBI getting just INR 51.92 billion of bids against the notified amount of INR 250 billion. This was despite outflows for income tax deducted at source and state government securities scheduled for the day, dealers said. While outflows for the former were expected to be around INR 400 billion to INR 500 billion, the latter would have drained INR 228.22 billion from the banking system Wednesday. The payment for tax deducted at source and excise duty will be completed over the next two days, dealers said.

The outflows will be largely offset by inflows from the RBI's purchase of gilts through an auction under its open market operations, dealers said. The central bank bought gilts worth INR 500 billion through an auction Tuesday. On the day, the RBI had net absorbed INR 1.37 trillion from the banking system, slightly higher than INR 1.21 trillion Monday. The cash balance parked by banks at the RBI's Standing Deposit Facility was INR 9.61 trillion Tuesday, slightly up from INR 9.52 trillion Monday.

OUTLOOK

* Thursday, the one-day call rate may open below the RBI's repo rate on comfortable liquidity.

* During the day, the call rate is seen at 5.50-5.95% and the tri-party repo rate at 5.50-5.90%.

* RBI will hold an overnight variable rate repo auction for INR 250 billion at 1000-1030 IST.

CALL RATE

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

5.90%--Wednesday's open for one-day loans

5.85%-–Tuesday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Opens below repo rate; volumes expected to remain higher

MUMBAI – The inter-bank call money rate opened below the Reserve Bank of India's repo rate of 6.00%, even as volumes are expected to remain high amid an escalation in tensions between India and Pakistan. As of 1020 IST, volumes in the call money market were INR 2.76 trillion, against a total volume of INR 6.11 trillion Tuesday, according to data from Clearing Corp. of India.

The one-day call money rate opened at 5.90% Wednesday. The weighted average rate was the same. Rates in the call money market are expected to be in the range of 5.85-5.90% and those in the triparty repo market are seen 5.70-5.75% .

Indian armed forces launched a military operation early Wednesday against nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating from, the Indian defence ministry said in a statement. Dealers had expected a retaliation from India after terrorists killed over 26 tourists on Apr. 22 in Kashmir, and the strikes were largely priced in, they said. Banks have recently been borrowing at low rates in the call money market to increase their reserves, dealers said. Banks' cash reserves with the RBI were INR 9.61 trillion Tuesday, and INR 9.52 trillion Monday.

"Even though we have seen a development in India-Pakistan situation, money markets won't have much of an impact because it was already priced in," a dealer at a state-owned bank said. "Press briefing is something that every market would look out for because we will get official confirmation from it. But still I think that money markets won't react to that as well."

Traders will closely track the press briefing by the Indian defence ministry at 1030 IST. While no pressure is expected on money market rates, volumes could increase if the briefing indicates a further escalation in tensions between India and Pakistan, dealers said. However, traders said a negative outcome from the press conference is unlikely. 

Borrowing in both the call money and triparty repo markets is largely expected to be from primary dealerships, small finance banks and payment banks, dealers said. Primary dealers usually borrow for payments at auctions of central and state government securities, while small banks borrow for funding commerical papers and certificates of deposits, they said. Mutual funds are expected to deploy their inflows in the triparty repo market, as is usual. Foreign banks are expected to borrow from the call money market to purchase gilts during the day after a sharp rise in government bond prices in early trade. 

"Small finance banks usually borrow at lower rates to fund their short-term assets...such as CPs and CDs," a dealer at a private sector bank said. 

On Tuesday, the RBI had net absorbed INR 1.37 trillion from the banking system, slightly higher than INR 1.21 trillion on Monday. Traders expect outflows of around INR 350 billion-INR 500 billion for excise duty payments Wednesday and Thursday, around 70% of which is expected Wednesday. Payments for Tuesday's state government security auction for a quantum of INR 228.22 billion will also take place Wednesday. These outflows are likely to be offset by inflows worth INR 500 billion from the RBI's purchase of gilts through an auction under its open market operations Wednesday. The auction was held Tuesday. 

The RBI's daily variable rate repo auction Wednesday is expected to attract low demand, with borrowers likely to bid for just INR 60 billion, much lower than the notified amount of INR 250 billion, according to an Informist poll. Bids at the daily auctions have been in the INR 55 billion-INR 65 billion range this week.  (Cassandra Carvalho)  End

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

Edited by Rajeev Pai

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