Overnight borrowing rates shoot up after RBI announcement

Overnight borrowing costs surged up to 35 basis points Monday after the Reserve Bank of India (RBI) late last week announced plans that aim to align short-term market rates with the reverse repurchase benchmark, underscoring the central bank’s calibrated shift toward an eventual drawdown of excess liquidity.

A basis point is 0.01 percent.

The central bank’s plan to suck out Rs. 2 lakh crore in a term repo auction triggered a jump in shorter duration rates including the tri-party repo rates (TREP), sovereign treasury bills, and inter-bank call money rate.

The overnight TREP touched 3.36 percent during Monday’s trade from a low of about 3 percent last Thursday, show data from the Clearing Corporation of India (CCIL). Although the weighted average rate did not change much, select trades were reported at more than 3.30 percent.

This may soon influence rates in new commercial papers through which corporates raise working capital.

The inter-bank call money shot up by about 23 basis points with the weighted average rate ending at 3.42 Monday. The intra-day low rate, which was around 1.9 percent last Thursday, zoomed to 2.5 percent Monday.

“The economic recovery is gaining strength amid mild price rises,” said Mahendra Jajoo, fixed income fund manager at Mirae Asset Management. “This, combined with RBI’s latest announcement, weighed on short-term rates that jumped Monday to the level of effective policy rate. The excess surplus liquidity in the system now may be gradually moderated, paving the way for a smooth unwinding of excess liquidity.”

The reverse repo, the rate at which banks park excess money with the central bank is now pegged at 3.35 percent.

Treasury bills, short term sovereign securities with about two-month maturities, yielded 15 basis points more.

“If rupee short-term interest rates were pushed up, with the world awash with very cheap money, we could end up attracting carry-seeking inflows,” said Ananth Narayan, associate professor of finance at the SP Jain Institute of Management and Research. “This could include foreign flows into rupee debt, unhedged foreign currency borrowings, and speculative flows.”

The RBI Friday sought to haul depressed overnight market rates toward the policy rate by signalling its intent to buy Rs 2 lakh crore in a 14-day reverse repo transaction.

It would conduct an auction on January 15 to take from banks the excess cash that has pushed the overnight rates way below the reverse repo rate, which banks get for parking excess cash with the banker of last resort. The banking system has a net surplus of Rs 5.63 lakh crore.

“The RBI has taken the first step toward reverting to pre-Covid liquidity management operations in a phased manner,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank in a report. “This would eventually help in normalizing monetary policy too.”

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