Interest rates in the call money market are poised to soften after the Reserve Bank of India Governor Shaktikanta Das encouraged banks to lend in the overnight market rather than depositing in the standing deposit facility (SDF).
The weighted average call rate has predominantly been above the repo rate since 10 August, following the announcement of the Incremental Cash Reserve Ratio. The repo rate is currently at 6.50 per cent. The weighted average call rate was 6.74 per cent on Friday. The SDF rate is 6.25 per cent, which is lower than the call money rate.
“It is advisable for banks with surplus funds to seek lending opportunities in the inter-bank call market rather than merely depositing funds in the SDF at less favourable rates,” Das commented during a post-monetary policy interaction with the media on Friday.
He noted that an increased volume of call money transactions would aid in deepening the inter-bank money market and reduce the dependence of deficit banks on the MSF.
Market observers anticipate that this shift could result in a decline in the weighted average call rate by approximately 20 basis points. Consequently, this recalibration might lead to a reduction in the yield on Treasury bills and could affect debt instruments with maturities of up to two years.
The Governor expressed concerns over the current call rates, noting that while banks are accessing the marginal standing facility, they are simultaneously depositing in the SDF.
“Clearly, the liquidity distribution is uneven. Banks should engage more in lending and calling rather than turning to a lower return SDF window,” said a dealer from a primary dealership. “This is why they haven’t broadened the market, which essentially indicates that the weighted average call rate will decrease. If it consistently drops by even 10-15 basis points, then the forefront, T-bills, will also reduce,” he added.
In the post-policy press conference, Das revealed that banks have borrowed Rs 80,000 crore from the MSF, while the total deposits in the SDF stand at Rs 56,000 crore.
Government bond yields are anticipated to open higher on Monday as market sentiment weakened after Governor Das indicated that the central bank might undertake open market operations to absorb liquidity.
The growth in US Treasury yields could further support this increase, dealers suggested.
“It will be challenging for the market to rally significantly. I don’t foresee a significant uptrend,” a dealer at another primary dealership commented. “However, we’ve had the weekend to ponder over all the implications. At worst, the market will stabilise here, and at best, it might recover by 4-5 basis points,” he added.
Government bond yields had soared to a seven-month peak on Friday. The yield on the benchmark 10-year government bond settled at 7.34 per cent on Friday.