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Informist, Tuesday, Dec. 16, 2025

 

By Cassandra Carvalho

 

MUMBAI – The one-day interbank call money rate Tuesday rose to 5.70%, above the Reserve Bank of India's Marginal Standing Facility rate of 5.50%, the highest since Oct. 29, which was before the RBI cut the repo rate by 25 basis points to 5.25%. The overnight triparty repo rate also hit a high of 5.60% for the second consecutive day in a row Tuesday. Money market rates have surged despite the central bank infusing transient liquidity of around INR 1.52 trillion so far this week. Outflows for tax payments, credit disbursements, and an unexpected fall in the rupee past the key 91 per dollar mark has pushed up demand for funds, which is likely to continue till the end of the month, dealers said.  

 

The Marginal Standing Facility is designed to be the ceiling for the call money rate under the central bank's liquidity adjustment facility corridor, with the Standing Deposit Facility providing the floor for the call rate. The overnight weighted average call money rate--which is the central bank's operating target--was 5.41% Tuesday, up from 5.25% Monday. The rate in the overnight triparty repo market--which is usually lower than call money rate since the triparty repo is a secured, collateralised loan market--ended at 5.49% Tuesday. The overnight weighted average TREPS rate was 5.32%, above the repo rate and up from 5.09% Monday. 

 

In spite of the temporary infusion of liquidity and despite the infusion of durable liquidity through open market operations and a dollar-rupee buy-sell swap scheduled for this week, money market rates are stubbornly above the RBI's preferred rate. The call money market rate is likely to continue being at or above repo rate for the rest of December, dealers said. 

 

The RBI had on Friday said it would conduct two variable rate repo auctions of INR 750 billion each Monday and Tuesday. At the 11-day variable rate repo auction Monday, the response was poor and the central bank took all bids worth INR 249.69 billion. Traders most likely underestimated the outflows for advance tax payments, which are now seen around INR 1.50 trillion, dealers said. Advance tax payments are seasonally higher in the December quarter, dealers said. Payments of around INR 700 billion-INR 1 trillion drained systemic liquidity Monday and dealers expect a similar figure to be paid out Tuesday.

 

After the poor response to the auction Monday, the RBI doubled the size of the 10-day variable rate repo auction Tuesday to INR 1.50 trillion and took all bids worth INR 773.79 billion. The tenure of the scheduled variable rate repo auctions deterred traders from bidding aggressively and the central bank conducted a second auction Tuesday for two days for a notified size of INR 500 billion. The auction was nearly fully subscribed at a weighted average rate of 5.27%. Traders are more comfortable borrowing for smaller durations even as the crunch in liquidity is likely to sustain till the end of the month, dealers said. The infusion Tuesday is unlikely to be enough and banks are likely to end up borrowing from the central bank's Marginal Standing Facility, dealers said. 

 

"Today (Tuesday) the rates are already out of the RBI's control, we will see a rise in borrowing in MSF also," a dealer at a small finance bank said. "Around INR 1 trillion can be borrowed from MSF today."

 

Other than advance tax, other government-related outflows have left traders flying blind on the outflows expected this week. By next week, outflows of around INR 1.70 trillion as payments for goods and services tax will drain liquidity further, dealers said. The central bank's net absorption from the banking system – a proxy for the liquidity surplus – was INR 1.20 trillion Monday, down from INR 1.83 trillion Sunday.

 

"We have advance tax outflows of INR 1.25 trillion to INR 1.30 trillion, of which 75% were done today (Tuesday). Other than this, we also have EPFO outflows and other government-related outflows, which is also why rates are higher," a dealer at a state-owned bank said. "There will not be another VRR today (Tuesday), but there will be one more tomorrow (Wednesday) or later this week because of GST payments," the dealer said. The RBI is likely to conduct another variable rate repo auction for at least INR 500 billion Wednesday, though traders differ on the expected tenure, dealers said. Some traders expect a two-day variable rate repo while others expect a longer-term operation of around eight to 10 days.

 

Most traders are no longer sitting on excess liquidity, and some traders expect that liquidity could slip into a deficit Tuesday while others expect the RBI's liquidity infusions to cushion the fall. If the liquidity does turn deficit, it would be the first time since Oct. 28. The central bank's average net absorption from the banking system has been INR 1.86 trillion since the RBI's Monetary Policy Committee cut the repo rate by 25 basis points on Dec. 5. At the post-policy press conference, RBI Governor Sanjay Malhotra had committed to providing sufficient liquidity for monetary policy transmission. 

 

The unexpected fall in the rupee past the 91-per-dollar mark has also worsened the liquidity crunch in the banking system, dealers said. The RBI's "hands-off" approach on the rupee has led to minimal intervention this month, and settlement of the central bank's dollar sales in the foreign exchange spot market is not a major drain on systemic liquidity, dealers said. However, the rise in rupee premiums has led traders to borrow in money markets and park funds in forwards to take advantage of the arbitrage between the two, dealers said. 

 

The central bank has dialled down its intervention through dollar sales to protect the rupee, and has likely sold only around $500 million-$700 million on an average in the spot market daily so far this week. At the announcement of the RBI's Monetary Policy Committee's decision on Dec. 5, Malhotra had announced a two-tranche open market operation auction of INR 1.00 trillion to buy gilts this month as well as a $5 billion three-year dollar-rupee buy-sell swap auction. The RBI bought gilts worth the entire notified amount of INR 500 billion at the first OMO auction on Dec. 11 and is expected to buy a similar amount of bonds at the OMO auction Thursday. The central bank accepted bids worth $5.07 billion at the dollar-rupee buy-sell swap auction Tuesday. Speculation of the RBI conducting another OMO or swap this month itself is gaining traction as money market rates are likely to remain elevated, dealers said.  

 

To top it all off, a rise in credit disbursements after the repo rate cut earlier this month is fuelling demand for funds, dealers said. Banks are also borrowing for longer tenures that surpass the quarter-end to ensure any unforeseen demand during the upcoming holiday season is met. The 23-day call money rate, which matures on Jan. 8, was last traded at 5.85% Tuesday.

 

"After the repo rate cut, people are rushing to borrow, because then we also have quarter-end, (calendar) year-end, month-end demand," a dealer at another state-owned bank said.  End

 

US$1 = INR 91.03

 

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

 

With inputs from J. Navya Sruthi and Pratiksha

Edited by Deepshikha Bhardwaj

 

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