Overnight rates may rise if RBI hikes the MSF rate

Expected if RBI raises MSF rate today, to keep spread with repo rise; however, these still expected not to breach 9%

Expectations are high for a rise in overnight borrowing rates for banks in the outcome of Wednesday’s monetary policy review.

As the Street expects the Reserve Bank of India (RBI) to raise the repo rate (for short-term borrowing by banks from it) by 25 basis points (bps), the Marginal standing facility (MSF, for overnight borrowing) might also be raised by 25 bps, to maintain the current spread between the two, of 100 bps.

Overnight borrowing rates rose recently due to the deadline for a third instalment of advance tax payment, on December 15. The weighted average call money rate was 8.75 per cent on Tuesday, compared with 8.15 per cent on Monday. The average Collateralised Borrowing and Lending Obligation (CBLO) rate was 8.70 per cent, compared with 8.37 per cent on Monday.

The call money and CBLO rates might rise and trade near nine per cent if RBI raises the repo rate to eight per cent and the MSF rate to nine per cent. However, most experts do not see the overnight rates breaching nine per cent.

“The credit growth is lower, due to which the system liquidity is pretty good. Government spending will be slower because they have to maintain the fiscal deficit target. But this will not put much pressure on liquidity because of the liquidity available with banks from RBI's special dollar swap window. Overnight rates are not seen touching double digits,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund. The fiscal deficit target for the current financial year is pegged at 4.8 per cent of gross domestic product.

Borrowing by banks under the MSF is also on the decline, as they feel the repo rate will again become the operational one. “Overnight rates will move in the range of eight to nine per cent if the repo rate and MSF rate are raised. Banks are in a comfortable liquidity position, due to which borrowings under MSF are lesser,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.

At the start of December, overnight rates were much below the current levels because banks converted the funds raised from RBI’s special dollar swap window into rupees. The rates had, in fact, fallen below seven per cent even on weekdays.

Some experts believe the overnight rates could rise much above nine per cent if government spending does not flow back into the system. “In that case, overnight rates might rise further. Otherwise, it is expected to trade between the repo and MSF rate,” said Alok Singh, chief investment officer (fixed income), BOI AXA Mutual Fund.

It is estimated that the advance tax payment has drained out Rs 50,000-70,000 crore worth of liquidity from the system.