Call and short-notice money rises sharply in October on tight liquidity conditions

call and Notice money

The money at call and short notice of all scheduled banks rose sharply on a yearly basis in October after liquidity turned tight, according to Reserve Bank of India (RBI) data.

The data showed that money at call and short notice stood of all scheduled banks at Rs 45,027.42 crore as on October 6 this year compared to Rs 26,204.66 crore as on October 7, 2022.

Call money refers to short-term loans between lenders that have to be paid back the moment repayment is asked for. Short-notice funds allow for up to 14 days to be repaid after the notice is received.

Money market experts said the tight liquidity conditions in October after the announcement of the incremental cash reserve ratio (I-CRR) and tax outflows saw banks more active in this market over last year, when liquidity was in surplus mode.

“The RBI has been vigilant about liquidity in the banking system and allowed liquidity to get into deficit taking measures like I-CRR, and stayed away from making use of short-term liquidity management tools like VRR (variable rate repo) as the last VRR move was in June (before July Consumer Price Index print),” said Mataprasad Pandey, vice president, Arete Capital Service, a Mumbai-based financial services firm.

Also read: RBI approves Kotak Mahindra Bank's acquisition of Sonata Finance

The numbers

The data also showed that money at call and short notice of scheduled commercial banks stood at Rs 30,585.24 crore as of October 6, 2023, compared to Rs 12,565.49 crore as of October 7, 2022, in scheduled commercial banks.

Scheduled commercial banks include regional rural banks, small finance banks and private banks.

As of September 22, money at call and short notice stood at Rs 39,815.72 crore for all scheduled banks.

Liquidity movement 

Liquidity in the banking system, which was in huge surplus last year, started falling due to efforts taken by the central bank such as conducting VRR auctions and using other tools. On top of this, tax and other auction outflows also drained liquidity substantially.

But after the withdrawal of Rs 2,000-denomination banknotes from circulation, liquidity in the system again started rising and to combat this, the central bank conducted various VRRR auctions in May, June and July.

However, these auctions were just temporary measures that did not help much, hence the RBI in its August monetary policy introduced the I-CRR to remove excess liquidity from the banking system.

On August 10, the central bank said that with effect from the fortnight beginning August 12, scheduled banks would have to maintain an I-CRR of 10 percent of the increase in their net demand and time liabilities (NDTL) between May 19 and July 28.

Also read: Rate cuts not on the agenda at the moment, says RBI Governor Das

Liquidity in the system had narrowed by over Rs 1.42 lakh crore as of August 13.

After a review, the central bank on September 8 decided to discontinue the I-CRR in a phased manner and said that 25 percent of the funds maintained under the I-CRR would be released on September 9 and 25 percent on September 23. The remaining 50 percent, it said, would be released on October 7.

By mid-September and October, liquidity dipped into deficit mode even after the complete reversal of I-CRR.

The outlook

Money market experts said that as long as liquidity remains in deficit, we can expect growth in money at call and short notice, but the pace would slow due to the skewed distribution of liquidity.