Call money rates hit near 5-month high at 6.96% as liquidity tightens

Call Money

The intra-day high of India’s overnight call money rate surged to a five-month high at 6.96 percent on August 23 due to demand for funds from banks after the liquidity in the banking system turned deficit.

The call money rate is the rate at which short-term funds are borrowed and lent in the money market by banks.

According to the Clearing Corp of India (CCIL), the overnight call money rate opened at 6.85 percent, and then touched an intra-day high of 6.96 percent.

Today’s intra-day high level was the highest since March 31, 2023. In March, the call money rate touched 8.10 percent due to the financial year-end.

Presently, the weighted average overnight call money rate was trading at 6.8109 percent.

“The TREPS rate is hovering at 6.75 percent and the weighted average call money market weighted is only 6.81 percent which is normal and only 5 -6 basis points (Bps) above the TREPS rate. This is because system liquidity turned deficit amid I-CRR and tax outflows,” said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.

Also read | A good yarn: Gokaldas Exports’ story of success likely to continue

Liquidity in the banking system turned deficit on August 22 for the first time since start of this financial year due to temporary withdrawal of liquidity due to Incremental Cash Reserve Ratio (I-CRR) and outflows on account of goods and services tax (GST) outflows.

According to Bloomberg data, the banking system liquidity turned deficit for the first time since March 26, 2023.

Currently, liquidity in the banking system is in a deficit of around Rs 15,552.43 crore, as compared to Rs 23,644.43 crore.

Starting August 12, scheduled banks must maintain an I-CRR of 10% of their increase in NDTL between May 19 and July 28.

This narrowed the surplus liquidity by over Rs 1.42 lakh crore as on August 13.

Also read | This auto ancillary stock loses overhang, sets 25% revenue growth goal

The central bank announced the I-CRR with an aim to manage the excess surplus liquidity in the economy after the return of Rs 2000 banknotes to the banking system (after they were withdrawn from circulation).

“This measure is intended to absorb the surplus liquidity generated by various factors, including the return of Rs 2,000 notes to the banking system,” Das said at the press conference on August 10.

In the last few months, liquidity in the banking system has risen sharply after the withdrawal of Rs 2,000 bills, the transfer of RBI’s surplus to the government, an uptick in government spending, and capital inflows.

However, since the announcement of I-CRR, the liquidity surplus has fallen sharply and turned deficit.

Money market dealers expect the liquidity to turn positive in the coming days after the government spending kicks in towards the month's end on account of salaries and pensions.

“The overnight and short-term rates to ease after the liquidity in the banking system will get into surplus,” a dealer with a state-owned bank said.