By Christina Titus
The Reserve Bank of India’s (RBI) decision to extend trading hours has not helped in improving volumes in the call market due multiple reasons. Market participants said that the demand is muted due to massive surplus liquidity in the banking system and sluggish credit growth.
On June 25, the RBI announced the extension of trade timings of overnight money markets. Under the revised schedule, the call market has been extended to 7 pm from 5 pm earlier, effective from June 1. Accordingly, trading hours of tri-party (TREPs) will be till 4 pm from August 1.
Even after expanding the trading hours, the average volume stands at Rs 16,000 crore, unchanged from earlier, when the call market followed previous trading hours, according to data from Clearing Corporation of India Limited.
“It will take some time to adapt to the new market hours. Currently, everybody continues to close their positions before 5 pm and nobody wants to stay up until 7 pm,” said a money market dealer with a private sector bank. He added that only small ticket borrowing happens after 5 pm.
The demand in the call money market will likely remain subdued as long as the system has huge surplus liquidity, said money market traders. The liquidity surplus was Rs 4.09 lakh crore as of July 6, the RBI data showed. The banks parked Rs 2.50 lakh crore at RBI’s Standing Deposit Facility, where they earn an interest of 5.25%. RBI conducted variable reverse rate repo auctions twice in order to suck out excess liquidity and to align overnight rates near repo rate.
The weighted average call rate ended 5.26% on Monday and TREPs was 5.11%. The call market reported a volume of Rs 17,060 crore on Monday.
“The extended time of the call market is considered as an emergency window and it will serve at the time of an outflow. It will also take care of some portion of Marginal Standing Facility (a window where banks borrow from RBI at an interest of 5.75%). However during normal hours, participants always prefer a secured tri-party market over the call market,” said Alok Singh, treasury head, CSB Bank, adding that it is hard to grow the volume or trading activity in the inter-bank overnight market.
Dealers expect the demand to improve in September when the system faces quarter-end pressure on account of tax outflows. Some optimism over credit growth picking up during the festive season will also contribute to an uptick in the inter-bank call money market volume.
