Weighted average call money rate trades over repo rate as banking liquidity turns tight

Call Money market

The weighted average call money rate, which is an overnight rate at which banks lend to each other, traded above the Reserve Bank of India’s (RBI) repo rate in the last two weeks after the liquidity in the banking system fell into deficit.

According to the RBI data, in the last two weeks, the weighted average call money rate traded in the range of 6.62 percent to 6.73 percent. The repo rate stands at 6.50 percent.

Liquidity in the banking system started falling into deficit from November 19, when it was in a surplus of around Rs 1.04 lakh crore, and went into a deficit of Rs 30,848.24 crore on November 27.

Money market experts attributed it to the limited government spending, forex intervention by the RBI to cap Indian rupee losses, and seasonal currency in circulation leakage amid marriage and rabi season.

To support liquidity, the central bank has so far conducted four variable rate repo (VRR) auctions of various tenures worth Rs 25,000 crore each.

Through these auctions, the RBI injected Rs 1 lakh crore into the banking system.

Money market experts said the temporary liquidity injection by the RBI was done because liquidity in the banking system is expected to receive inflows on account of month-end spending by the government towards salaries and pensions. This will also lead to easing short-term rates in the market.

Impact on other rates

The movement in the overnight call money rate is significant because other short-term debt instruments such as treasury bills, commercial papers, and certificates of deposit rates get adjusted accordingly.

The rise in call money rates also impacted the cut-off yield on treasury bills in the primary market. The cut-off yield during auctions increased by 2-4 basis points across tenures.

The 91-day treasury bills cut-off yield, which was 6.4581 percent on November 21, went up to 6.4929 percent on November 27. Similarly, the cut-off yield on 182-day treasury bill rose to 6.6599 percent on November 27, from 6.4581 percent on November 21.

The cut-off yield on 364-day T-Bills rose to 6.6545 percent on November 27, from 6.6200 percent on November 21.