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Informist, Thursday, Jun. 5, 2025

By Siddhi Chauhan

MUMBAI – The weighted average call rate Thursday ended marginally above the Reserve Bank of India's Standing Deposit Facility rate of 5.75% as banks partook in arbitrage trade ahead of the Monetary Policy Committee's outcome Friday, dealers said. "Many PSUs (state-owned banks) are doing arbitrage due to anticipation of RBI widening the LAF (Liquidity Adjustment Facility) corridor," a dealer at state-owned bank said. "Today (Thursday) I am earning a spread of 10 to 15 basis points, tomorrow (Friday) I might earn nothing if the corridor is widened."

Other than a 25-basis-point rate cut, some market participants expect the RBI to widen its Liquidity Adjustment Facility corridor asymmetrically, bringing the Standing Deposit Facility rate to 50 bps below the policy repo rate from the current spread of 25 bps. This would be similar to a 50-bps cut in the policy rate, as the overnight rate will continue to hug the lower end of the LAF corridor with surplus liquidity in the banking system, dealers said. A small fraction of the market expects the RBI to widen the Liquidity Adjustment Facility corridor to 50 bps on either side of the repo rate.

The one-day call money rate closed at 5.55% Thursday, lower than 5.45% Wednesday. The weighted average call rate was 5.76%, marginally higher than 5.75% Wednesday. The triparty repo rate, where mutual funds are major lenders, closed at 5.67% Thursday. The weighted average triparty repo rate was 5.66%, up from 5.62% Wednesday.

The widening of spreads between the call money market and triparty repo market have resulted in opening an opportunity for banks to borrow at cheaper rates from the money market and parking them under Standing Deposit Facility of 5.75%. As per RBI data, funds parked at its Standing Deposit Facility were at INR 2.99 trillion Wednesday, marginally down from INR 3.14 trillion Tuesday.

If the central bank widens the Liquidity Adjustment Facility corridor, the passive deployment of funds at the Standing Deposit Facility will reduce and encourage banks to participate more in the money market.

Due to spread trading, the total money market volume, including triparty repo, rose to INR 5.74 trillion Thursday. The total money market volume was INR 5.54 trillion Wednesday. Volumes in the overnight call money market amounted INR 1.48 trillion, up from INR 1.37 trillion Wednesday, while that in the triparty repo market was at INR 3.79 trillion, up from INR 3.69 trillion Wednesday. 

During the day, miniscule outflows for excise duty and tax deducted at source took place, dealers said. The remaining amount for the same is expected to be drained from the system on Friday. Overall, outflows for excise duty and tax deducted at source are expected to drain INR 200 billion to INR 500 billion, dealers said. On Wednesday, the RBI had net absorbed INR 2.86 trillion from the banking system, marginally lower than the INR 3.01 trillion Tuesday, central bank data showed.

At the overnight variable rate repo auction held during the day, banks and primary dealerships borrowed INR 41.38 billion against the notified amount of INR 250 billion.

OUTLOOK

* On Friday, the three-day call rate is likely to open below the RBI's repo rate of 6.00% on comfortable liquidity.

* During the day, the call rate is seen in a range of 5.10-5.85% and the triparty repo rate in a range of 5.05-5.80%.

* RBI will hold three-day variable rate repo auction for INR 250.00 billion at 1200-1230 IST.

CALL RATE

5.55%--Thursday's close for one-day loans

5.80%--Thursday's open for one-day loans

5.45%--Wednesday's close for one-day loans

BENCHMARK MIBOR (in %)

Mumbai Interbank Offer Rates compiled by Financial Benchmarks India:

India Call: Below RBI repo rate on ample liquidity, low demand for funds

MUMBAI – The interbank call money rate was below the Reserve Bank of India's repo rate of 6.00% on Thursday due to low demand for funds from banks on ample liquidity, dealers said. The one-day call money rate opened at 5.80% Thursday and, at 0954 IST, the weighted average call rate was also at the same level. The triparty repo rate, where mutual funds are major lenders, opened at 5.63%, below the RBI's Standing Deposit Facility rate of 5.75%.

On Wednesday, the RBI had net absorbed INR 2.86 trillion from the banking system, tad lower than the INR 3.01 trillion Tuesday, central bank data showed. The net liquidity absorbed narrowed slightly due to outflows worth INR 281.77 billion for payment of state government security auction held on Tuesday. The payment for the said auction takes place on Wednesday. 

During the day, the first tranche of outflows for excise duty and tax deducted at source are expected to drain around INR 250 billion, dealers said. The second tranche, which will take place on Friday, will drain the remaining INR 250 billion from the banking system, dealers said. 

In the call money market, banks were on the lending side while primary dealerships were on the borrowing side. Mutual funds were the usual lenders in the triparty repo market, dealers said. Outflows for excise duty are unlikely to have a significant impact on money market rates and volumes, keeping the call money rate to trade in the range of 5.50-5.90% and those in the triparty repo market to trade in the range of 5.40-5.75%, dealers said.

Ample liquidity with the banks is expected to dampen their participation in the overnight variable rate repo operation, with the central bank receiving just INR 45 billion bids against the notified amount of INR 250 billion. "Banks have good amount of liquidity with them which is visible from the excess funds parked under SDF (Standing Deposit Facility)," a dealer at a public sector bank said. "Only primary dealerships will participate at the auction". As per RBI data, funds parked at its Standing Deposit Facility were at INR 2.99 trillion Wednesday, marginally down from INR 3.14 trillion on Tuesday. 

Market participants look forward to the RBI's Monetary Policy Committee meeting outcome on Friday. Traders widely expect the repo rate to be cut by 25 bps for the third straight time. A few participants also expect the rate-setting panel to cut the repo rate by 50 bps. Some traders also expect the RBI to widen the Liquidity Adjustment Facility corridor Friday to 50 basis points on either side of the repo rate, from 25 bps currently. (Siddhi Chauhan) End

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

Edited by Ashish Shirke

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