Overnight money market rates harden above repo rate
The Reserve Bank of India (RBI) conducted a four-day variable rate repo (VRR) auction on Monday to inject liquidity into the banking system, even as overnight money market rates hardened, rising above the repo rate.
Banks’ sought to draw funds aggregating ₹75,695 crore from the RBI against the notified amount of ₹75,000 crore at the auction. They received funds aggregating ₹75,004 crore at the cut-off rate of 6.51 per cent.
Bankers’ attributed the tightness in liquidity in the banking system to outflows related to advance tax and indirect tax payments. This resulted in the overnight money market rates hardening above the repo rate of 6.50 per cent.
Repo rate is the interest rate at which the RBI provides liquidity to banks to overcome short-term mismatches. Money market provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.
VRR auction
The central bank last conducted VRR auction on May 19, when banks drew funds aggregating ₹46,790 crore from the RBI, against the notified amount of ₹50,000 crore at the cut-off rate of 6.51 per cent.
“The RBI is giving liquidity to the market through VRR auction. Earlier, the liquidity used to be around ₹1.50-1.60 lakh crore. It came down to around ₹85,000 crore on Saturday. This is due to advance tax outflows of about ₹1.50-lakh crore. Plus, there will also be some direct tax outflows of about ₹40,000-50,000 crore.
“So, around ₹2-lakh crore will go into government coffers, beginning June 15 to June 21,” said Rama Chandra Reddy, Deputy General Manager (Head-Treasury), Karur Vysya Bank.
He observed that the RBI conducted VRR auction anticipating tax outflows and tight liquidity.
“Call money and TREPS (Tri-party Repo) are trading in the higher band (around Marginal Standing Facility/MSF rate of 6.75 per cent). The RBI wants call money rate to come down to 6.50 per cent.
“If call money trades around 6.25 per cent, the RBI will conduct Variable Rate Reverse Repo/VRRR. If call money trades at around 6.75 per cent, it will conduct VRR. Their target rate is around 6.50 per cent. So, they modulate liquidity accordingly via VRR and VRRR auctions,” said Reddy.
The weighted average rate (WAR) in the call money market rose to 6.64 per cent against previous day’s WAR of 6.18 per cent. Intra-day, call money rate tested a high and low of 6.85 per cent and 5 per cent, respectively, per CCIL data.
The WAR in the TREPS dealing system nudged up to 6.60 per cent against previous day’s WAR of 6.57 per cent. Intra-day, TREPS rate tested a high and low of 6.77 per cent and 6.20 per cent, respectively.
The WAR in market repo tightened to 6.60 per cent against previous day’s WAR of 5.50 per cent. Intra-day, the market repo rate tested a high and low of 6.80 per cent and 5.50 per cent, respectively.
Funds are transacted on overnight basis in call money market.
TREPS facilitates borrowing and lending of funds in Triparty Repo arrangement. CCIL is the Central Counter-Party to all trades on the TREPS Dealing System.
Market repo entails buy and sell-back arrangement of government securities and state development loans between lenders and borrowers.
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