Higher interbank rates could push up those of short-term debt instruments: Analysts

Call Money market

An uptick in interbank call money rates is expected to further push up other short-term debt instruments rates as well in the coming days, money market experts said.

Usually, whenever the rates on call money go up, the rates on commercial papers (CPs), certificates of deposit (CDs), and Treasury bills (T-bills) go up in tandem.

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.

Rates on CPs and CDs have already moved up by 5 basis points since last week due to tight liquidity conditions in the banking system.

“It’s obvious that tight liquidity will add to push the rates higher,” said V. Ramachandra Reddy, Head of Treasury, The Karur Vysya Bank.

Adding to this, Ritesh Bhusari, deputy treasury head at South Indian Bank, said it will continue to impact unless the operating (call money) rate is at the level of the repo rate.

The repo rate is an interest rate at which lenders take loans from the Reserve Bank of India (RBI), and which is the central bank’s key policy rate.

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The weighted average call money rate, which was trading below the repo rate since the start of this month, went above the marginal standing facility (MSF) rate on February 12 and February 13 owing to higher deficit liquidity in the system.

The liquidity support provided by the RBI through variable rate repo (VRR) auctions has not helped to ease the situation much.

So far in February, the central bank conducted six VRR auctions to infuse liquidity, holding two such auctions a day on February 7, 9 and 12. The bids submitted by banks in most auctions remained higher than the notified amount due to tight liquidity conditions. However, the central bank only accepted amounts close to the notified amount in each auction.

Currently, the liquidity in the banking system is in deficit by around Rs 2.13 lakh crore, as per the RBI’s money market operation data of February 12.

Due to this, rates on CPs issued by non-banking financial companies (NBFCs) were trading at 8.60-8.80 percent, and those of manufacturing companies were trading at 7.90-8.10 percent.

Before the monetary policy on February 8, these rates were trading at 8.50-8.70 percent for NBFC CPs and 7.90-8.05 percent for manufacturing CPs.

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Money market experts said the central bank will continue to support liquidity through VRR auctions when it turns tight or there are huge outflows from the system.

“The RBI will continue to support the market with liquidity (VRR or variable rate reverse repo or VRRR auctions) depending on the situation as the RBI wants the TREPS (Triparty Repo) rate around the repo rate level,” said Arun Bansal, executive director and head of treasury at IDBI Bank.

Adding to this, Bhusari added that will support to balance and maintain levels around the repo rate.