In a bid to rebalance liquidity in the banking system, the Reserve Bank of India on Thursday conducted a one-day Variable Rate Repo auction for ₹50,000 crore to cool overnight call money market rates. The rates have been hardening over the past few days due to outflows from banks on account of Goods and Services Tax (GST) payments.

Call money market is a market for uncollateralised lending and borrowing of funds. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers. 

“With larger than anticipated collections under the GST, system liquidity has tightened in this week. This is also reflected in the hardening of overnight money market rates, and in amounts under the fixed rate reverse repo of the liquidity adjustment facility (LAF),” the central bank said in a statement. 

Bankers’ said smaller and mid-sized banks have their funds deployed as loans or investments. So, when the time comes to remit money on behalf of their clients to the large banks authorised to collect GST, they borrow, thereby creating upward pressure on money markets rates.

With overnight call money being dealt as high as 4.65 per cent on Thursday, the central bank stepped in, announcing that it will conduct a one-day variable rate repo auction for ₹50,000 crore.

As against the notified amount of ₹50,000 crore, RBI received bids aggregating ₹65,700 crore. It accepted bids aggregating ₹50,003 crore at the cut-off rate of 4.06 per cent at the auction. This move had the desired impact, with the last trade taking place at 3.35 per cent. The RBI last conducted a variable rate repo auction in March 2021. 

RK Gurumurthy, Treasurer, Dhanlaxmi Bank, said: “In the last few days, overnight rates (both collateralised and clean) have surged beyond the Marginal Standing Facility (MSF) rate (of 4.25 per cent) as payments towards GST have created a temporary mismatch in systemic liquidity. This has also had its immediate impact on short term money market rates (Certificate of Deposits/Commercial Papers etc).” 

For example, June maturing Bank Certificate of Deposits are getting priced at at least 10-15 basis higher on perception that short term rates may remain elevated.

“RBI, therefore, announced a variable rate repo auction… One can expect a repeat tomorrow if three-day money again hovers above the MSF rate on sustained basis. It may have a salutary effect by softening short term volatility,” Gurumurthy said. 

Spike in call money

Market players opine that the spike in call money is only temporary. Once the government starts spending, money will again come back into the banking system.

Moreover, Banks will be receiving the funds -- ₹2,49,416 crore on January 25 and ₹ 4,31,426 crore on January 28. This is due to reversal of funds they had deployed with RBI in variable rate reverse repo auctions. 

 

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