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Informist, Wednesday, May 21, 2025

 

By Vidhushi RajPurohit

 

MUMBAI – The Reserve Bank of India's continued encouragement to banks to participate in the interbank call money market, along with the widening of arbitrage between the call market and triparty repo market, has led to an increase in the daily average volumes in the call money market, according to dealers.

 

In April, the daily average volume in the overnight call money market had risen sharply to INR 131.14 billion, the highest since May 2019 when liquidity in the banking system was in deficit for the entire month. So far this month, the daily average volume is INR 126.43 billion. The daily average volume in the call money market has been increasing gradually from January when it was INR 94.48 billion. Trade volume for one-day call on May 5 was INR 201.21 billion, which was the highest since March 2020, as per RBI data. The share of call money market in the total money market volume had fallen to just 2.3% in 2023-24 (Apr-Mar) from 21.5% in FY12, according to the latest data available.

 

Market participants are of the view that the increase in the call market volumes coincides with the systemic liquidity returning to a surplus, which provides banks with excess funds that they can lend in the interbank call money market, dealers said. Despite the current surplus in the banking system, market participants are of the view that the surplus is skewed, with large state-owned banks having a bigger share of the surplus. Notwithstanding the overall systemic surplus, cooperative banks and small finance banks still need to borrow from the money market, which has kept volumes in money market up.

 

Liquidity in the system has returned to a surplus because of the consistent liquidity infusing measures by the RBI. Since January, the central bank has bought government bonds worth INR 4.84 trillion through open market operations auctions. The major sellers at these auctions were state-owned banks, which had in their held-to-maturity portfolios large quantities of the bonds that the RBI had offered to buy.

 

On the lending side in the call money market, state-owned banks have increased their participation, at least partly on account of the nudge from the RBI, dealers said. Perhaps, the RBI has more than nudged the large banks. "Majorly PSU banks were asked by the RBI to lend more in the call market, because they have funds and they were the ones parking it majorly at SDF (Standing Deposit Facility)," a dealer at a private sector bank said.

 

The RBI has been urging banks to trade actively in the call money market for a while. Way back in October, Shaktikanta Das, who was then the RBI governor, had highlighted the asymmetric liquidity in the banking system and had urged banks to lend their surplus funds in the call money market. "It is desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates," Das had said.

 

"The RBI has been calling banks way before the MPC (Monetary Policy Committee) meeting (in October) to increase the participation in the money market," a dealer at a state-owned bank said. "Then the governor also said the same in the policy statement which has actually led to some uptick in the activity."

 

Until December, banks were reluctant to lend in the call money market perhaps also because the spread between the interbank call money rate and the triparty repo rate was low. This spread has been fluctuating and rising slowly, but has risen significantly in the first quarter of calendar 2025. The spread of the weighted average call rate over the low of the triparty repo rate in Jan-Mar averaged 35 basis points, against 15 bps a year ago. Even since April, the spread has stayed around 30 bps, from 19 bps in the same period a year ago, according to calculations by Informist.

 

"There is a good spread of nearly 20 to 30 basis points for players now as they can borrow funds at the TREPS market, then use it to lend in call market," a dealer at another state-owned bank said. The daily average volume in the triparty repo market has also increased to INR 3.74 trillion in April from INR 3.3 trillion in the same month a year ago. "Similarly, they are also doing the spread trade when parking funds at SDF, because they got the funds at a cheaper rate in (call) market (and they) then just use all excess of it to keep at SDF," the dealer at the state-owned bank said.

 

Banks borrow in the call market when the rates fall below 5.75%, the SDF rate, and then park these funds with the RBI to earn 5.75%. In April, banks parked INR 1.83 trillion with the RBI on a daily average basis, a sharp jump from INR 859.31 billion they had parked on an average in April 2024.

 

Banks had been increasingly parking funds with the RBI's Standing Deposit Facility, even though the overall banking system was in a deficit for nearly three and a half months since mid-December. According to the RBI's State of Economy report in January, banks parked an average of INR 830 billion daily between Dec. 16 and Jan. 14 in the Standing Deposit Facility while the systemic liquidity was in a deficit of above INR 1 trillion for most days in that period.

 

"It is also a matter of timing as banks can park funds at SDF later in the day when call market closes," a dealer at a private sector bank said. The trading in the call market closes at 1700 IST. There have been discussions on extending the call money market timing to 1900 IST from the current 1700 IST and a working group set up by the central bank for reviewing market trade and settlement timings has recommended this extension.

 

Some dealers are of the view that extension of the timing could further improve volume in the call market and reduce the passive deployment of funds at the Standing Deposit Facility. An extension of market hours would mean banks would deploy the excess surplus in the interbank call money market, which will further boost volumes, and this will result in a fall in the funds available to park with the RBI at the end of the day.

 

In the State of Economy report in January, RBI staff had observed that some banks were avoiding lending in the call money market after borrowing funds from the RBI at its variable rate repo auctions and this was skewing the distribution of liquidity in the banking system. The RBI's focus on improving volumes in the call money market is also aimed at keeping it relevant for determination of monetary policy transmission to the broader financial system, a dealer at another private sector bank said.

 

After the Monetary Policy Statement in February, RBI Governor Sanjay Malhotra had said that some banks were reluctant to lend in the uncollateralised call money market and instead were parking funds with the central bank. He urged banks to actively trade among themselves in the uncollateralised call money market to make it "deeper and vibrant for better signal extraction from the weighted average call money rate".

 

Market participants are of the view that the volumes in call market will remain around current levels despite any fluctuations in the systemic liquidity because of the RBI's persistent efforts to keep the call market relevant. Speaking after the Monetary Policy Committee meeting in April, RBI Governor Malhotra had said the central bank would maintain systemic liquidity in a surplus of 1% of banks' net demand and time liabilities to ensure better transmission of policy rates. As of May 2, the NDTL of the banking system was around INR 230 trillion, which means the liquidity surplus ought to be around INR 2.30 trillion, a level that is now very much in sight.  End

 

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

 

Edited by Ashish Shirke

 

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