Call money rates hit near 5-month high at 6.96% as liquidity tightens
On August 23, India’s overnight call money rate experienced a notable surge, reaching its highest level in five months at 6.96 percent during intra-day trading. This increase was primarily driven by a heightened demand for funds from banks, resulting from a shift in liquidity dynamics within the banking system.
The overnight call money rate is a key benchmark in the money market, representing the rate at which short-term funds are both borrowed and lent by banks. In this context, the rate serves as a measure of the cost of borrowing or lending funds on a short-term basis.
According to data from the Clearing Corporation of India (CCIL), the overnight call money rate initiated trading at 6.85 percent before ascending to an intra-day peak of 6.96 percent. This movement underscores the volatility and fluctuations that can occur in short-term borrowing and lending rates due to varying demand and supply dynamics in the financial system.
The spike in the overnight call money rate to a five-month high is indicative of changing liquidity conditions and the corresponding impact on the cost of short-term borrowing for banks. Such shifts can be influenced by factors such as changes in the Reserve Bank of India’s monetary policy stance, market liquidity levels, and prevailing economic conditions.
Umesh Kumar Tulsyan, the Managing Director of Sovereign Global Markets, a fund house based in New Delhi, has offered insights into the prevailing situation in the money market. He highlighted that the Treasury Bills Repurchase (TREPS) rate is currently at 6.75 percent, and the weighted average of the call money market stands at 6.81 percent. This slight difference of only 5-6 basis points (Bps) above the TREPS rate is considered normal.
Tulsyan explained that this situation has emerged due to a shift in the liquidity dynamics within the banking system. Specifically, the banking system experienced a temporary deficit in liquidity on August 22. This marked the first instance of liquidity turning deficit since the commencement of the current financial year. The liquidity shortfall occurred as a result of two key factors: the Incremental Cash Reserve Ratio (I-CRR) and the outflows stemming from the goods and services tax (GST).
The I-CRR, which involves a temporary withdrawal of liquidity from the banking system, and the GST-related outflows contributed to the liquidity deficit. These factors collectively impacted the availability of funds within the system and led to the observed fluctuations in short-term borrowing and lending rates in the money market.
Overall, the analysis provided by Umesh Kumar Tulsyan sheds light on the specific factors influencing the money market’s liquidity conditions and the resulting impact on borrowing rates in the context of the recent liquidity deficit and the subsequent movements in short-term rates.
Bloomberg data reveals that the liquidity within the banking system has shifted to a deficit position for the first time since March 26, 2023. This marked shift indicates a change in the availability of funds within the banking system, which can impact various financial activities, including borrowing and lending rates.
Presently, the liquidity deficit in the banking system amounts to approximately Rs 15,552.43 crore, as compared to the earlier surplus of Rs 23,644.43 crore. This change signifies a notable shift in the balance of available funds within the banking system.
This shift in liquidity dynamics can be attributed to the implementation of the Incremental Cash Reserve Ratio (I-CRR) requirement that commenced on August 12. As per this requirement, scheduled banks are mandated to maintain a Cash Reserve Ratio (CRR) of 10% for the increase in their Net Demand and Time Liabilities (NDTL) between the period of May 19 and July 28. This I-CRR rule led to a reduction in the surplus liquidity by more than Rs 1.42 lakh crore as of August 13.
In essence, the data underscores the recent shift from liquidity surplus to deficit within the banking system, particularly due to the implementation of the I-CRR requirement. This change can influence various aspects of the financial market, potentially affecting borrowing, lending rates, and overall market dynamics.
The central bank introduced the Incremental Cash Reserve Ratio (I-CRR) as a strategic step to manage the excessive surplus liquidity present in the economy, a situation that arose following the reintroduction of Rs 2000 banknotes into the banking system after their previous withdrawal from circulation.
Governor Shaktikanta Das provided insight into this measure, expressing that it’s designed to absorb the surplus liquidity generated due to various factors, notably the reintegration of Rs 2,000 notes into the banking system. Das conveyed this information during a press conference on August 10, elucidating the rationale behind the introduction of the I-CRR.
In recent months, the liquidity levels within the banking system have undergone a substantial increase. This surge in liquidity can be attributed to multiple factors, including the reissuance of Rs 2,000 notes, the transfer of the Reserve Bank of India’s (RBI) surplus to the government, an upswing in government spending, and inflows of capital.
However, following the announcement of the I-CRR, the scenario experienced a significant change. The liquidity surplus that had been prevalent in the system experienced a considerable reduction, eventually transforming into a liquidity deficit.
In essence, the central bank’s introduction of the I-CRR was a deliberate measure aimed at addressing the considerable excess liquidity that had been generated in the banking system due to various contributing factors. This strategic move reflects the Reserve Bank of India’s commitment to maintaining a balanced and efficient financial environment within the broader economy.
Money market dealers are anticipating a shift in liquidity dynamics, with expectations of liquidity turning positive in the near future. This transformation is foreseen to occur as government spending comes into play towards the end of the month, primarily attributed to the disbursement of salaries and pensions.
Dealers in the money market express their anticipation that both overnight and short-term interest rates will experience a relief in the coming days. This optimism is grounded in the notion that as liquidity within the banking system transitions into a surplus, the pressure on these rates is likely to ease.
A representative from a state-owned bank, who is actively engaged in the money market, affirmed this sentiment, stating that the prevailing overnight and short-term rates are expected to alleviate as liquidity conditions move into a state of surplus. This change reflects the underlying dynamics between liquidity availability and the corresponding impact on borrowing and lending rates within the financial system.
In summary, money market dealers are foreseeing a positive shift in liquidity conditions, driven by anticipated government spending towards month-end. This positive shift is poised to have a positive impact on overnight and short-term rates, fostering an environment of eased pressure within the money market.
