Money Market Rates Rise Following RBI Liquidity Move

MUMBAI: A recent action by India’s central bank to absorb excess liquidity from the banking sector has triggered an increase in money market rates, and this trend is anticipated to continue in the near term, according to market participants. This decision follows closely after the Reserve Bank of India (RBI) implemented a substantial rate reduction and introduced measures to enhance cash flow.

The Reserve Bank of India is scheduled to execute a seven-day variable rate reverse repo (VRRR) operation on Friday, amounting to 1 trillion rupees ($11.64 billion). This marks the first such intervention since the end of November.

Significance of the VRRR Operation

The implementation of VRRRs underscores the RBI’s concern regarding overnight and treasury bill rates, which have remained below the repo rate.

  • These rates are projected to align more closely with the repo rate as the RBI persists with these operations, potentially focusing on shorter durations.
  • Analysts suggest that this could elevate short-term funding expenses for banks, partially offsetting the advantages gained from the earlier rate cut.
  • The weighted average call rate, which serves as the RBI’s operational rate, has consistently hovered near the Standing Deposit Facility (SDF) rate in recent weeks.
Contextual Background

Earlier this month, reports indicated that the RBI might initiate VRRRs to manage surplus liquidity as needed.

  • Liquidity levels in June have averaged approximately 2.76 trillion rupees daily, surpassing 1% of total banking deposits.
  • The RBI is targeting a surplus of around 1%, as indicated by the Governor.
  • Last week, it was reported that the RBI sought input on better aligning the call rate with the repo rate.
Expert Opinions
Alok Singh, Group Head of Treasury at CSB Bank:

“Money market rates are expected to be affected, with treasury bill yields likely to increase by 5-10 basis points.”

Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership:

“A well-calibrated daily VRRR could have been more effective in rapidly raising overnight policy rates.”

“The key focus now will be on whether the RBI proactively shifts to shorter tenor VRRRs if the tendering in the 7-day auction remains subdued.”