Overnight call rate hits 21-month high, RBI opens Rs 50,000 cr repo

The shortfall prompted the Reserve Bank of India to announce an immediate borrowing window for Rs50,000 crore.

The central bank’s move has underscored its commitment to ensuring liquidity needs even as it unwinds excess cash through Variable Reverse Repo Rate (VRRR) auctions amid the diminishing threat of coronavirus infections.

The overnight call surged as much as 4.65%, the most since April 20, 2020, show Bloomberg data compiled by ETIG. The weighted average rate was 4.36% versus 4.01% Wednesday, show data from CCIL/RBI.

The central bank conducted an overnight variable repo, a window through which banks could borrow at a weighted average rate of 4.10%.

Dealers blamed the shortfall on outflows for Goods and Services Tax (GST) payments and market arbitrage trades.

“GST outflows reduced money from the banking system at a time when VRRR auctions sucked out liquidity,” said Gopal Tripathi, head of treasury at Jana Small Finance Bank. “This collectively caused call rates to shoot up.”

“Once VRRR money comes for maturity in the next few days, call rates will likely come back below repo rate again,” he said.

With the larger than anticipated collections under the GST, system liquidity has tightened this week, said RBI.

“This was, as RBI mentioned, due to its policy to rebalance liquidity conditions in a non-disruptive manner while maintaining adequate liquidity to meet the needs of the productive sectors of the economy,” said Madan Sabnavis, chief economist at Bank of Baroda.

The central bank has been draining liquidity through VRRR auctions. Last week, Rs4.31 lakh crore was absorbed at a weighted average rate of 3.97% through an auction with 14-day maturity.

Dealers said bank treasuries captured an arbitrage opportunity as they could borrow from the call money market at much lower rates only to park the cash in VRRR auctions. The differential could be as much as 97 basis points, adding to banks’ trading profits.

“Some banks, who sought to gain from such arbitrages were stuck due to the latest 14-day auction as the GST outflow pressure weighed on their cash coffers,” said the chief dealer from a large bank.

The surplus cash in the banking system was at Rs6.06 lakh crore on January 19 compared with Rs6.73 lakh crore on January 12, show the latest available data from the RBI until press time on Thursday.