Interest rates in the call money market are expected to decrease following the request from Reserve Bank of India (RBI) Governor Shaktikanta Das for banks to lend in the overnight market instead of using the standing deposit (SDF) facility.
Since the announcement of the incremental cash reserve ratio (I-CRR) on August 10, the weighted average call rate has mostly remained higher than the repo rate.
The repo rate is currently at 6.50%, while the weighted average call rate stood at 6.74% on Friday. The SDF rate is 6.25%, lower than the call money rate.
During a post monetary policy interaction with the media on Friday, Das stated, “It is desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates.” He added that increased call money transactions would deepen the inter-bank money market and reduce the need for deficit banks to rely on the marginal standing facility (MSF).
Market participants anticipate that this move will lead to a decrease of around 20 basis points (bps) in the weighted average call rate. Consequently, this adjustment could result in a decline in the yield on treasury bills and impact debt instruments with maturities of up to two years.
Governor Das expressed dissatisfaction with the current call rates. He highlighted that while banks use the MSF, they also make deposits in the SDF.
“Obviously, the liquidity is asymmetric. And, banks should lend and call more rather than accessing a lower return SDF window,” commented a dealer at a primary dealership. “That is why they did not deepen the market. This also means that the weighted average call rate will come down. If it consistently decreases even by 10-15 bps, then you will see that the front end, T-bills will come down,” the dealer added.
During the post-policy press conference, Das revealed that banks have borrowed Rs 80,000 crore from MSF, while total deposits in the SDF amount to Rs 56,000 crore. The expectation is for government bond yields to open higher on Monday due to dampened market sentiment. The rise in US treasury yields may further contribute to higher yields, according to dealers.
“It will become very difficult for the market to rally,” said a dealer at another primary dealership. “However, we had the weekend to think about all the implications. At worst, the market will settle here only, and at best, it will recover by 4-5 bps,” the dealer added.
On Friday, government bond yields reached a seven-month high, with the yield on the benchmark 10-year government bond settling at 7.34%.