Call money rates shoot up due to bank holidays

During intra-day trade the rate touched a high of 8.5% after opening at 8%

Following two consecutive bank holidays, the call money rate rose about 75 basis points on Saturday, as lenders rushed to borrow from the overnight market to meet their reserve needs ahead of another two consecutive days of market holiday. Clearing Corporation of India data showed during intra-day trade, the rate touched a high of 8.5, after opening at eight per cent.

In recent times, the call money rate has been around the repo rate, which is eight per cent.

According to data, the weighted average rate stood at 7.88 per cent on Wednesday and, during intra-day trade on that day, it had touched a high of 8.1 per cent, against 8.15 per cent on Saturday.

Banks have to adhere to a cash reserve ratio (CRR) requirement of 95 per cent daily, including on Saturdays, and 100 per cent on a fortnightly basis. CRR is the proportion of total deposits a bank has to keep with RBI as cash. Currently, it stands at four per cent of banks’ net demand and time liabilities (NDTL).

“Some stability in the rates might be seen from Tuesday. Not much volatility in rates is expected this festive season,” said the head of treasury of a state-run bank.

Typically, liquidity tightens in the festive season, as currency in circulation increases. However, this time, it might be different because from last month, the Reserve Bank of India (RBI) put in place a revised framework for liquidity management. Under this framework, RBI conducts more frequent term repos; it might also carry out overnight variable rate repo auctions, depending on the liquidity conditions. This is aimed at helping banks address liquidity issues better.

Before this framework was in place, the call money rate had risen to more than nine per cent.

Bankers find it difficult to adhere to CRR requirements on Saturdays, as RBI does not conduct daily liquidity adjustment facility (LAF) operations on these days. Some lenders, including State Bank of India, have urged the central bank to open the LAF window on Saturdays, too.

A senior public sector bank official, however, said, “RBI doesn’t want money market operations on Saturdays; as the LAF window is not there on Saturdays, it becomes difficult for us to manage liquidity needs. We suggested in such a case, even real-time gross settlement and national electronic fund transfers shouldn’t be there on Saturdays. But RBI didn’t agree to this,” he added.

Overnight borrowing from the repo window is capped at 0.25 per cent of banks’ NDTL. Banks can borrow from the term-repo window at 0.75 per cent of NDTL.