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Overnight money market rates near MSF despite slew of VRR auctions

The liquidity deficit in the banking system stood at Rs 2.23 trillion on Wednesday, according to data by the central bank

RBI

Anjali Kumari Mumbai

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Despite the Reserve Bank of India’s efforts, the overnight money market rates have surged close to the Marginal Standing Facility (MSF) rate. The persistent liquidity deficit in the banking system, hovering around Rs 2 trillion, remains despite the Reserve Bank of India's efforts through variable rate repo auctions since 8 February. As a consequence, the weighted average call rate has escalated by 22 basis points within the same period.

Shaktikanta Das, Governor at the Reserve Bank of India, had said in his post-monetary policy statement that the RBI would try to keep liquidity at a level wherein the overnight call rate, the operating target of the monetary policy, remained around the repo rate.
 

The liquidity deficit in the banking system stood at Rs 2.23 trillion on Wednesday, according to data by the central bank.

“System liquidity is still in the negative if we look at it. Because of the VRR auctions, the overnight rate has come down a little bit. I am not sure whether it will sustain because now we have Goods and Services Tax (GST) payment lined up. Government spending anyway is coming down and that is the primary reason why the overnight rates are higher right now. The liquidity is in negative because the government is not spending so much,” said Dwijendra Srivastava, Executive Vice-President and Chief Investment Officer of Debt at Sundaram Asset Management Company.

Earlier in February, when the liquidity deficit eased to Rs 1 trillion, overnight money market rates had dipped below the repo rate. In response, the central bank initiated a series of variable rate reverse repo auctions to realign the rates with the repo rate.

Meanwhile, the yield on commercial papers and certificates of deposit has risen by 5-14 basis points across tenures during the period.

Market participants expect the rates to remain elevated in the near term.

“With liquidity tightness in the system, and no indication of rate cuts, the rates will remain on the higher side in the near term,” Ajay Manglunia, Managing Director and Head (Institutional Fixed Income), JM Financial.

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First Published: Feb 15 2024 | 7:42 PM IST

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