What triggered spikes in short-term interest rates? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/banking/what-triggered-spikes-in-short-term-interest-rates/articleshow/82977192.cms

Synopsis–“The liquidity surplus has reduced with the CRR (cash reserve ratio) rollback and likely rising government cash balances,” said Anand Bagri, Head – domestic markets at RBL Bank. “This has put some pressure on short term rates that are seen rising sporadically.”

Interest rates at the short end of the yield curve are rising in India due to a reduction in surplus system liquidity as the freedom over impounded cash pools, given to banks at the peak of the crisis last year, is withdrawn in phases.

“The liquidity surplus has reduced with the CRR (cash reserve ratio) rollback and likely rising government cash balances,” said Anand Bagri, Head – domestic markets at RBL Bank. “This has put some pressure on short term rates that are seen rising sporadically.”

The banking system now has a surplus of Rs 3.84 lakh crore, compared with Rs 5.25 lakh crore on April 30. Rates on certificate of deposits (CD) have shot up 33 basis points since the first week of April, show data compiled by India Ratings.

interest rate

The CRR is the amount of cash that banks are mandated to maintain with the Reserve Bank of India and the funds earn little interest. The CRR limit has been scaled back to 4% in two phases. The CRR was reduced by 100 basis points last year, releasing liquidity in the system.

A basis point is 0.01%.

Three-month Treasury Bills, which are short-term sovereign instruments, yielded 3.40% Tuesday, about 32 basis points higher than the level seen in the last week of December.

“The gradual increases in short term rates are pointing to a change in expectations of rate contour, from ultra-loose to loose, which originates from resumption of normal liquidity,” said Soumyajit Niyogi, associate director at India Ratings. “Although there is no credit demand for now, such elevated rates may not sustain unless loans begin to expand after lifting of the localised lockdowns.”

Last February, the RBI decided to roll back the CRR in two phases.

Effective May 22, the CRR returned to 4%.

On March 27, it was raised to 3.5% from 3% earlier.

“Short-term market opportunities and regulatory changes spurred activities in the CD market,” said Ritesh Bhusari, deputy general manager (Treasury) at South Indian Bank. “At the same time, a partial credit demand is beginning to appear as small companies scramble for cash amid localized lockdowns.”

Moderate investor demand is one another reason behind the spike in short-term rates.

“Mutual funds are witnessing a somewhat stagnant AUM in the liquid category with no major fresh inflows in the past few months,” said Mahendra Jajoo, chief investment officer – fixed income at Mirae Asset Investment Managers (India). “This has partially cut demand for short term debt instruments, which is reflected in the rising rates.”

Twelve-month CDs yielded 29 basis points higher until May 18 with the six-month gauge at 3.59% versus 3.24% on April 6.

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