Call money market volumes remain low despite RBI nudge

Call Money market

The volumes in the call money market have remained lower over the last few days, even after the Reserve Bank of India (RBI) nudged banks with surplus funds to focus on the call money market over the standing deposit facility (SDF).

Money market experts said volumes dipped because banks always keep some emergency funds in SDF, and park the rest in the call money market.

The call money market is where banks borrow from or lend to each other for the short term, usually one day, at market-determined rates. The SDF is RBI’s liquidity absorption tool, that allows banks to park excess liquidity overnight with the RBI and earn interest.

“Banks always park some emergency funds in SDF. All excess funds cannot be lent in the call money market,” said Mataprasad Pandey, Vice President, Arete Capital Service.

Rajeev Pawar, Head Of Treasury, Ujjivan Small Finance Bank, said that only some overnight surplus that is required for RTGS outflows is kept under SDF.

During the monetary policy review on October 6, RBI Governor Shaktikanta Das had said that banks with surplus funds should explore lending opportunities in the inter-bank call money market, rather than passively park funds in the SDF at relatively less attractive rates.

He added that the greater volume of call money transactions would not only help deepen the inter-bank money market but would also reduce the dependence of liquidity-deficit banks on the marginal standing facility (MSF).

The MSF allows banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up.

Das’ comments came after it was seen that even though liquidity in the banking system was in a deficit, some banks, instead of lending in the call money market, were parking funds in  SDF.

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Volumes in call money market

Since the start of this month, volumes in the call money market were marginally lower,  in the range of Rs 9,000 crore to just over Rs 10,000 crore.

Earlier, volumes in the call money market ranged between Rs 10,000 crore to Rs 12,000 crore, but thereafter it fell to a little over Rs 9,000 crore.

On October 3, call market volume stood at Rs 12,213.06 crore, while on October 4 it was Rs 10,685.33 crore, and Rs 10,862.05 crore on October 5, according to RBI data.

But after a monetary policy review, the call market volume stood at Rs 9,622.20 crore on October 9, Rs 9,900.35 crore on October 10, Rs 10,054.18 crore on October 11, Rs 9,149.22 crore on October 12, and Rs 10,742.23 crore on October 13, per RBI data.

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Liquidity conditions

The liquidity condition in the banking system has remained tight since last month, even after the withdrawal of the incremental cash reserve Ratio (I-CRR).

This was mostly attributed to heavy outflows in September on account of goods and service tax and advance tax. On top of this, earlier, the RBI had removed liquidity through the I-CRR, whereby scheduled banks had 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.

As of October 15, liquidity in the banking system was in a deficit of over Rs 18,000 crore, as per RBI’s money market data.

According to Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, going ahead, banking system liquidity will tighten further due to outflows for GST payments (towards the end of the week), bond auctions, and increase in currency-in-circulation (CIC), which will offset the limited government spending.

“Given the recent trend of muted government spending, we expect liquidity to remain tight through the rest of the month (despite the $5 billion FX swap due next week), before easing comfortably into surplus territory by end-October/early-November,” Bhardwaj added.