Huge surplus liquidity drags weighted average call money rate below repo this month

Call Money market

Weighted average call money rate has been trading lower than the repo rate since the start of this month, which experts attributed to higher surplus liquidity in the banking system.

According to the RBI data, weighted average call money rate remained in range of 6.31-6.45 percent between November 1 and 12, whereas the repo rate stands at 6.50 percent. In October, call money rate stayed volatile at or below the repo rate.

The call money rate is the rate at which banks borrow or lend short-term funds in the money market.

When liquidity in the banking system turn into huge surplus, banks refrain from borrowing funds from the RBI and lends money in the money market, which pulls down the rates on short-term debt instruments.

Call money rate is considered to stay at or slightly below the repo rate because it has direct implication on short-term rates. Lower call money rate can bring down interest rates on short-term debt instruments.

In the last few months, liquidity in the banking system remained in surplus due to higher government spending, intervention by the RBI in the foreign exchange market to curb a sharp fall in rupee, and month-end spending of government towards salaries and pensions.

Since the start of this month, liquidity remained in huge surplus, which money market dealers attributed to redemption of government securities. “Systemic liquidity surplus continued to improve last week, aided by G-sec redemptions, despite heavy tax-related outflows,” Kotak Mahindra Bank said in a report on November 11.

Liquidity in the banking system is estimated to be in surplus of around Rs 2.05 lakh crore.

To remove higher surplus liquidity from the banking system, the central bank has conducted seven variable rate reverse repo (VRRR) auctions of various tenures ranging between overnight and four day. The central bank conducted three times 3-day VRRR auction, two times 2-day VRRR auction, and one each overnight and 4-day VRRR auctions so far this month.

The total notified amount of all these VRRR auctions were Rs 8.75 lakh crore, and banks have only parked Rs 4.18 lakh crore, as per the RBI data.

Huge surplus liquidity also lowers the borrowing by banks through Marginal Standing Facility (MSF). As per the RBI data, its borrowing through this instrument remained in the range of Rs 1,500 crore to Rs 10,400 crore.