Recent developments in the overnight call money market have seen a notable increase in interest rates, surpassing the 6.75 per cent marginal standing facility (MSF) rate. This upward movement underscores the prevailing liquidity constraints within the banking system, with multiple factors at play, including the Reserve Bank of India’s (RBI) directive for banks to temporarily uphold incremental cash reserve ratio (I-CRR), outflows due to GST payments, and RBI’s intervention in the foreign exchange market.
During Monday’s trading, the overnight call money rate surged to an intraday high of 6.95 per cent, eventually settling at 6.65 per cent. The weighted average rate (WAR) stood at 6.7697 per cent, with transactions conducted on an overnight basis within the call money market.
Within the framework of the monetary policy, RBI maintains the call money within the Liquidity Adjustment Facility (LAF) corridor. This corridor ranges from 6.25 per cent (Standing Deposit Facility designed to absorb surplus liquidity) to 6.75 per cent (Marginal Standing Facility created to inject liquidity), with the mid-point set at the repo rate of 6.50 per cent. This structure enables RBI to modulate call money rates within this specified range.
Rama Chandra Reddy, Deputy General Manager of Treasury at Karur Vysya Bank, attributes the liquidity challenges to multiple factors, including outflows totaling approximately ₹2 lakh crore due to I-CRR, GST payments, and RBI’s forex market interventions. Consequently, this has led to an escalation in call money rates.
Typically, when the call money rate approaches the upper limit of the LAF corridor, RBI conducts variable rate repo auctions to inject liquidity and align the rate more closely with the repo rate of 6.50 per cent.
Starting from the fortnight commencing August 12, 2023, RBI directed scheduled banks to uphold an incremental cash reserve ratio (I-CRR) of 10 per cent on the increased deposits between May 19, 2023, and July 28, 2023.
This measure is designed to absorb surplus liquidity stemming from various factors such as the return of ₹2000 banknotes to the banking system, RBI’s surplus transfer to the government, an uptick in government spending, and capital inflows. RBI Governor Shaktikanta Das clarified in his August 10th bi-monthly monetary policy statement that this step is a temporary measure aimed at managing excess liquidity.
Das emphasized that despite this temporary measure, the system would still have adequate liquidity to meet the credit requirements of the economy. The I-CRR will undergo review by September 8 or sooner, with the objective of returning the impounded funds to the banking system ahead of the festival season. He reiterated that the existing cash reserve ratio remains unchanged at 4.5 per cent.