RBI’s liquidity move lifts weighted average call money rates by 12 bps | Finance News

The Reserve Bank’s liquidity measures announced last week to drain surplus from the banking system lifted weighted average call money rates by 0.12 per cent on Monday, experts said.

The measures, including moves to increase the daily CRR maintenance limit to 99 per cent and bond sales through open market operations, will also help accelerate rate hike transmission, they said.

The weighted average call money rate on Monday stood at 5.43 per cent against 5.31 per cent on October 9, according to the Clearing Corporation of India’s (CCIL) data.

Money market experts said high surplus liquidity in the banking system can weaken the transmission of a policy rate hike by reducing banks’ dependence on market borrowings and allowing them to meet credit demand using readily available funds.

When banks have ample liquidity, they face less pressure to raise deposit rates to attract funds, which can delay an increase in lending rates for borrowers. The excess liquidity also keeps short-term money market rates lower, limiting the immediate impact of a policy rate hike on overall borrowing costs.

As a result, the transmission of monetary tightening to bank lending rates and broader economic activity may be slower and weaker.

“Rate hikes amid an extreme liquidity surplus can weaken monetary policy transmission. Hence, it was essential for the RBI to absorb surplus liquidity and bring overnight rates closer to, or even above, the repo rate to ensure effective transmission of its policy stance by taking measures like increasing daily CRR maintenance and OMO sales,” said Mataprasad Pandey, vice president at Choice Wealth.

In a note, economists at the country’s largest lender SBI said the Reserve Bank of India’s (RBI) will reduce flexibility in daily fund management, and that banks have generally maintained CRR balances above 95 per cent of the requirement.

“Overall, it tightens liquidity without raising the CRR, which suits the current phase of rupee support too and the MPC stance,” the note added.

Last week, the central bank announced several measures on liquidity and foreign exchange, including increasing the minimum daily maintenance of the Cash Reserve Ratio (CRR) and Open Market Operations (OMO) sales of government securities.

The RBI announced the increase in the daily maintenance of CRR to 99 per cent from 90 per cent earlier.

Further, it announced an OMO sale auction of government securities worth Rs 25,000 crore to be held on October 13.

The liquidity measures aimed to drain huge surplus from the banking system, which built up following large inflows of FCNR(B) deposits.

Since then, the RBI has been conducting various variable rate reverse repo (VRRR) auctions to absorb liquidity in order to bring overnight money market rates to the repo rate.

On October 6, RBI Governor Sanjay Malhotra, during the post-monetary policy press conference, said the huge banking system liquidity is to be absorbed within the current financial year through various means such as currency leakage, the Reserve Bank’s liquidity operations, and banks’ reserve requirements.