Central bank step to keep call rate under check

Deadline for second installment of payment of corporate advance tax is Sept 15

The sharp volatility in overnight rates during corporate advance tax payment could be much less this time, due to the Reserve Bank of India (RBI)’s revised framework for liquidity management.

The deadline for a second instalment of payment of this tax is September 15. “Typically around Rs 50,000-crore outflow happens due to these tax outflows. During mid-September for a few days, there is volatility in overnight rates by about 100 basis points (bps). This time the overnight rates might continue to hug the repo rate,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

Last month, RBI had said it would conduct more frequent term repos and also do overnight variable rate repo auctions if required, depending on the liquidity condition. The aim is to help banks manage liquidity in a better way. The new framework begins on Friday.

RBI had said on many occasions that it wants overnight rates to be close to eight per cent, the repo rate, and the revised liquidity framework was announced to facilitate that. In the recent past, overnight rates had even traded 100 bps above the repo rate. The key reason for this was because such borrowing from the repo window is capped at 0.25 per cent of a bank's net demand and time liabilities.

The cap remains but RBI had said in August that it might exercise an over-allotment option above the notified amount, based on the day's evolving liquidity conditions.

However, rates of short-term instruments such as certificates of deposit (CDs) and commercial paper (CP) might continue to harden during this payment season. “People remove money from mutual funds during these times and fund houses are absent for buying CDs and CP,” said K Ramanathan, chief investment officer at ING Investment Management.

The impact of rates hardening is seen more on CDs and CP of two to three months' tenure. However, said Venkatesh, the rates might not harden more than 20-25 bps in these instruments.

Due to the RBI liquidity steps, experts also believe banks might decide to go slow on raising CDs for liquidity management.