MC EXCLUSIVE RBI seeks market view on aligning short-term rates to repo rate

Reserve Bank of India

The Reserve Bank of India (RBI) has sought the views of market participants for getting short-term overnight rates closer to the repo rate, treasury heads aware of the development said.

For the last few months, the central bank has been trying to align the overnight call rate—which has been trading sharply lower amid huge surplus liquidity in the banking system—closer to the repo rate.

The gap between the repo and overnight call money rates suggests that banks are availing of cheaper funds from the market compared to the RBI’s liquidity operation. Today, the call money rate is 21 basis points (bps) lower than the repo rate, compared to 10-15 bps in April when liquidity started turning positive. Prior to this, the call money rate was trading either at or over the repo as liquidity was in deficit.

An email sent to the RBI for confirming this information remained unanswered at the time of publishing of this story.

Sources said that this is the reason the RBI has taken market participants' views to align the rates closer to each other. Additionally, treasury heads have also requested the central bank to go slow on the variable rate repo (VRR) front as liquidity is in huge surplus and money is available cheaper in the overnight market compared to the RBI's liquidity tool. The RBI going slower will also help increase call money market volumes because liquidity availed of by entities such as standalone primary dealers via VRR will come to the overnight market.

The liquidity in the banking system was in surplus by around Rs 2.68 lakh crore as on June 16.

According to the RBI, the weighted average call money rate (WACR), on average, traded 16 bps below the policy repo rate during April-June (up to June 4) compared to 6 bps above the repo rate in February-March.

“Reflecting the improvement in liquidity conditions, the WACR—the operating target of monetary policy—traded at the lower end of the LAF (liquidity adjustment facility) corridor since the last policy,” RBI Governor Sanjay Malhotra said while addressing the June monetary policy.

Usually, the overnight rates are considered as the benchmark for rates on all other short-term debt instruments such as commercial papers, certificates of deposit and treasury bills, among other. This means that when the call money rate drops, the rates on other instruments follow.

The sharp reduction in the overnight rates started after liquidity in the banking system turned into surplus in April due to various liquidity-infusion measures undertaken by the RBI.

The central bank used tools such as open market operation (OMO) purchases and dollar-rupee buy/sell swap auctions to infuse durable liquidity in the banking system. Along with this, redemption of government securities, coupon payments and the government's month-end spending towards salaries and pensions too  helped.

Since the start of the calendar year, the RBI has purchased Rs 4.84 lakh crore worth of government securities from banks under OMO auctions. Moreover, it injected $25.2 billion to the banking system through dollar-rupee buy/sell swap auctions.