The interbank call money rate, which represents the overnight cost of funds for banks, rose to a high of 7 per cent on Monday as tax outflows exerted a lot of pressure on the banking system.
The average call rate of WACR, the operating target of the Reserve Bank of India s RBI s monetary policy, ended at 6.69 per cent on Monday, according to Clearing Corporation of India data.
At Monday's closing level, the WACR was much above the repo rate of 6.5 per cent and not far from the marginal standing facility MSF rate of 6.75 per cent. The MSF is the higher band of the RBI's interest rate corridor.
The banking system's liquidity has tightened significantly over the last few months and is likely to tighten further in the coming months, despite the fact that higher money market rates were driven by tax outflows, according to analysts. The higher cost of funds is because of the higher cost of corporate payments last week, but payments for GST on goods and services have commenced on Monday, analysts said. Over the last few months, the outflow per month has been worth about Rs 1.7 trillion, analysts said.
The jump in call rate is temporary because of the payments, but the liquidity surplus is slowly coming off, if you compare it month over month. Vivek Kumar, economist at QuantEco Research, said that the trend-wise, liquidity is coming off.
A short-term VRR variable rate repo announcement could be made by the – maybe an overnight repo or a five-day repo. He said that he said that the VRR could be provided for a temporary mismatch, because government spending takes about a week to hit the system.
On February 24, the cash balance of the government was around Rs 1.8 trillion, according to analysts.
According to the latest data, the central bank injected Rs 94,082 on March 19. There are 47 billion dollars in the banking system. The day before the central bank injected 1 trillion in the banking system, it was a day before it was injected with 1 trillion. The RBI has had the highest level of liquidity injections in the last few days since April 2019, a result of tighter liquidity conditions.
The RBI s aim is to keep the WACR in close alignment with the repo rate through liquidity operations. The RBI resumed variable rate repo operations last month after a hiatus of five months, with the latest operation being held on March 10. It had borrowed Rs 82,650 crore through the 14 day VRR held on March 10.