The call rate, or the rate at which banks lend overnight money to each other, fell to two-year low of 6.91% on Thursday, according to Clearing Corporation of India (CCIL) data. The last time the rate fell below this level was on July 25, 2013, when it touched 6.3%.
Ashutosh Khajuria, the executive director at Federal Bank, attributed this fall in overnight rate to the surplus funds in the market.
“When there is excess liquidity in the system, the call rate tends to move closer to the fixed reverse repo rate, which currently stands at 6.25%. Since the market is flush with funds, there are few takers for overnight money which has led to this trend,” Khajuria said.
Reverse repo is the rate at which banks park their excess funds with RBI — a sort of last option when no other avenues are available for investing the overnight money.
Money market participants indicate that the surplus liquidity in the system can be related to the absence of credit offtake in the system, adequate government spending and heavy redemptions of government securities in June close to Rs 60,000-70,000 crore.
An HSBC report said that while latest system loan data from RBI (end-June) show a slump to 9.3%, deposit growth held up at 11.4%, adding to the liquidity in the system, pushing the LAF (liquidity adjustment facility) into surplus territory for the first time in five years.
“The RBI is coming out with variable reverse repo auctions frequently to squeeze excess liquidity in the system,” said a leading broker.
On Friday, RBI conducted three-day and five-day variable repo auctions at cut-off rates at 7.22% and 7.24%, respectively. In the three-day tenor, the central bank received offers worth Rs 11,287 crore against the notified amount of Rs 10,000 crore whereas in the five-day tenor, RBI received offers worth Rs 12,027 crore against the notified amount of Rs 30,000 crore.
Moreover, the government spending has also contributed to ample liquidity even as the surplus cash balance with the government depleted since late June.
As of July 9, the government’s surplus cash balance stood at Rs 5,127 crore. Between July 2 and 7, the figure was at zero — down from Rs 34,377 crore on July 1, according to RBI data.
The collateralised borrowing and lending obligation (CBLO) rate on Thursday stood at 7.14% with volumes hitting Rs 72,303.70 crore against Rs 10,225.16 crore in the call money market.
CBLO is a money market instrument through which money is borrowed using government securities as collateral. On Friday, the CBLO rate stood at 6.82% against a call rate of 7.09%.