Short-term rates surge as net surplus liquidity nears zero

India‘s central bank may have to reverse its approach towards the currency markets and liquidity management after an ungainly spike in overnight lending rates Monday reflected the near-total erosion in systemic surplus-from about ₹8 lakh crore a year ago to within touching distance of a deficit last week.

To be sure, the odds haven’t lengthened yet on the Reserve Bank of India (RBI) persisting with further rate increases to restrain inflation. But analysts also believe the surge in call money rates will prompt the central bank to revisit liquidity measures. Its approach might include creation of dedicated repo calendars and less frequent currency-market interventions.

“The RBI will likely address this low liquidity with longer-term repo,” said Soumyajit Niyogi, director, India Ratings. “In fact, to alleviate the concerns, the central bank can come out with a long-term repo calendar. However, with the elevated operating and financial challenges, these occasionally sharp drops in banking system liquidity do not augur well, especially for entities with weaker credit profiles.”

The weighted average rate in the interbank call market, where banks lend and borrow among one another, was at 5.61% on Monday versus 5.17% last Thursday and 5.20% Friday, reflecting a surge of nearly half a percentage point.

Tax Payment Effect

Through the day’s trading, call money rates hit as high as 5.80%, or 40 basis points higher than the repo rate, now at 5.40%.

One basis point is 0.01%.

The repo is the rate at which banks borrow short-term funds from the RBI.

“The contraction in surplus liquidity in the banking system will likely halt the central bank’s upfront spot-market intervention to stem any drastic drop in the rupee’s value against the dollar,” said Anindya Banerjee, currency analyst at Kotak Securities.


When the RBI sells dollars to decelerate the rupee’s value decline, it essentially sucks out rupees from the banking system, further straining rupee liquidity.

Net surplus liquidity in the banking system dived to in excess of just Rs 3,200 crore last Friday, central bank data showed. The surplus was at Rs 8.03 lakh crore about a year ago.

The weighted average rate (overnight) in the Tri-party Repo (TREP) market Monday surged about a third of a percentage point, data from the Clearing Corporation of India showed. The gauge closed at 5.62% versus 5.30% last Thursday versus 5.27% Friday.

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Tax Obligations?

“Advance tax and GST payments have likely triggered the contraction in surplus liquidity,” said Sushanta Mohanty, general manager – treasury, Bank of Baroda. “Rising overnight rates are reflecting erosion in surplus liquidity, which may slip to deficit as well in the next few days. The RBI may come out with dedicated windows, like the variable repo rate or fixed-repo windows, to address the situation.”

The overnight TREP peaked at 5.75% for the day.

“Going forward, the RBI will remain vigilant on the liquidity front and conduct two-way fine-tuning operations as and when warranted – both variable rate repo (VRR) and variable rate reverse repo (VRRR) operations of different tenors, depending on the evolving liquidity and financial conditions,” RBI Governor Shaktikanta Das said during the bi-monthly policy on August 5.

Surplus liquidity in the banking system, as reflected in average daily absorptions under the Liquidity Adjustment Facility (both Special Deposit Facility and variable rate reverse repo auctions), moderated to Rs 3.8 lakh crore during June-July from Rs 6.7 lakh crore during April-May.

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