Overnight call money rate hardens beyond MSF rate

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Overnight call money market rates have hardened, going beyond the marginal standing facility (MSF) rate of 6.75 per cent, indicating liquidity tightness in the banking system on account of the Reserve Bank of India asking banks to temporarily maintain incremental cash reserve ratio (I-CRR), GST outflows, and RBI’s intervention in the forex market.

Overnight call money rate on Monday touched a high of 6.95 per cent intra-day, with the last traded rate being 6.65 per cent. The weighted average rate (WAR) was 6.7697 per cent. In the call money market, funds are transacted on overnight basis.

Under the operating framework of the monetary policy, the RBI keeps call money in the Liquidity Adjustment Facility (LAF) corridor of 6.25 per cent (Standing Deposit Facility to absorb surplus liquidity) to 6.75 per cent range (Marginal Standing Facility to inject liquidity), with the repo rate being the mid-point (6.50 per cent). So, it modulates call money within this corridor.

Rama Chandra Reddy, DGM – Treasury, Karur Vysya Bank, attributed the liquidity tightness to outflows aggregating about ₹2-lakh crore on account of I-CRR, GST payments and RBI’s intervention in the forex market. So, the call money rates have gone up.

Usually, when call money rate touches the upper-end of the LAF corridor, RBI conducts variable rate repo auction to inject liquidity and bring the rate closer to the repo rate (of 6.50 per cent).

With effect from the fortnight beginning August 12, 2023, RBI asked scheduled banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their deposits between May 19, 2023 and July 28, 2023.

This measure is intended to absorb the surplus liquidity generated by various factors such as return of ₹2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows, RBI Governor Shaktikanta Das had said in his August 10th bi-monthly monetary policy statement.

He then emphasised that this is purely a temporary measure for managing the liquidity overhang.

“Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy. The I-CRR will be reviewed on September 8or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. I must add that the existing cash reserve ratio remains unchanged at 4.5 per cent,” Das said.