Overnight call money rates on Wednesday fell below the policy rate, or the rate at which banks borrow from the Reserve Bank of India (RBI), currently at eight per cent.
Traders said better liquidity conditions led to lower demand from banks.
Call rates closed at 7.95 per cent, according to the Clearing Corporation of India.
On May 16, the overnight call rates had fallen to 7.8 per cent.
“Liquidity is comfortable in the system and markets are also discounting the possibility of a rate cut,” said a senior treasury official of a public sector bank.
RBI is scheduled to announce the first quarter review of monetary policy on July 31.
While economists feel sticky inflation and the dismal monsoon might prevent RBI from cutting rates, markets are hoping lower growth prospects could prompt the central bank to opt for monetary easing.
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Rates in the collateralised borrowing and lending obligations market fell to 7.65 per cent on Wednesday from 7.85 per cent yesterday.
Three-month overnight indexed swaps fell by three basis points to 7.84 per cent on Wednesday, reflecting the market perception of interest rates. Bank borrowings from RBI’s repo window fell to Rs 33,920 crore on Wednesday.
Typically, banks cover most of their reserve needs in the first week of the reporting fortnight, and demand for funds taper towards the end of the second week.
Since the past month, the liquidity deficit has been within RBI’s comfort range of one per cent of net demand and time liabilities.
Yields on government bonds edged up, ahead of fresh supply on Friday, when RBI is scheduled to auction Rs 15,000 crore of government securities.
Yields on the benchmark 10-year government bond closed at 8.1 per cent, compared with 8.07 per cent yesterday.
The rupee fell for the fourth session, as investors shed risky assets and the dollar strengthened globally.
On Wednesday, the rupee closed at 56.16 a dollar, 0.07 per cent lower than the previous close.
The dollar index touched 84 levels against six major currencies on Wednesday.
Traders said the central bank had intervened at the day’s low of 56.44, which helped the rupee gain 20 paise and rise to 56.12 against the dollar.
There were net sales of Rs 372 crore by foreign institutional investors in Indian equity markets on Wednesday, according to data from the Bombay Stock Exchange.