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Overnight rates inched up to near two-month high in the absence of additional term repo auctions by the Reserve Bank of India (RBI) to manage the advance tax outflow from the system. During intra-day trades overnight rates in fact breached the 9% mark.
According to estimates from the market the third installment of corporate advance tax outflow has resulted in liquidity drain to the tune of Rs 65,000-70,000 crore while the gap is yet to be filled up.
The Weighted Average Rate (WAR) in the call money market was 8.64% on Wednesday compared with 8.36% yesterday. The WAR stood at 8.81% on October 22.
"There has been no additional term repo and government spending is yet to happen. In such a scenario the overnight rates may continue to remain high. May be by Friday RBI may announce some additional term repo," said a trader with a state-run bank.
RBI wants overnight rates to hug the repo rate which stands at 8% after the last hike of 25 basis points in January.
In September, RBI had said it would conduct more frequent term repos and also do overnight variable rate repo auctions if required, depending on the liquidity condition. The aim was to help banks manage liquidity in a better way.
In the overnight variable rate repo auction held today RBI sucked out liquidity worth Rs 34,350 crore.
As the street expects interest rates to fall next year on the back of softening inflation, banks have been borrowing more through the call money market rather than Certificate of Deposits (CDs).
"When repo rate is expected to be cut, why get stuck by borrowing for 1 year through CDs. Banks are borrowing via CDs for short tenures of 2-3 months and they are also tapping the overnight market," said Ashutosh Khajuria, president (treasury), Federal Bank.
