Longer call money trading hours likely to address liquidity mismatch

The RBI has proposed extending call money trading hours to 7 PM from 5 PM to better align liquidity with 24x7 payment systems and address mismatches in fund flows

The Reserve Bank of India’s (RBI’s) proposal to extend the trading hours of the call-money market to 7 pm from 5 pm is aimed at having enough liquidity to serve the operational needs of real-time payments systems of banks, according to market participants.

 

The call-money market is a short-term market where financial institutions borrow from one another.

 

There have been instances when banks borrowed heavily from the RBI’s liquidity adjustment facility (LAF) and had to park excess funds with the standing deposit facility (SDF) at a lower rate due to a liquidity mismatch.

 

“We have been asking for extended hours. What we have seen is that when, at the end of the day, excess liquidity is available, the money is going to the SDF. It is paradoxical that you have system liquidity in deficit and the SDF balances are significant. Extending trading hours will correct this anomaly,” said C S Setty, chairman, State Bank of India, while responding to a query on the issue during the bank’s earnings press conference last week.

 

Market participants have expressed concern about the liquidity mismatch, noting that the 24x7 availability of payments systems enables transactions beyond traditional banking hours, resulting in banks receiving funds late in the evening.

 

While some banks are experiencing a liquidity deficit, others are holding surplus funds, leading to increased reliance on the SDF and marginal standing facility (MSF).

 

“It will help in settling transactions of banks because they can access the interbank market for funding till 7 pm as against 5 pm now. Otherwise for any outflows after 5 pm, banks have to borrow from the MSF against the statutory liquidity ratio at a slightly higher rate and pay the corridor spread to the RBI,” said Anshul Chandak, head of treasury, RBL Bank.

 

“Having said that, (it should be stated that) call-market volumes are low now as against the MSF. The intent is also to build back the call money market,” he added.

 

The tripartite repo (TREP) segment accounts for the largest share in the overnight money market, with 69 per cent of daily average volumes, followed by market repo at 29 per cent. The share of call money has declined from 13 per cent in 2014-15 to about 2 per cent in recent years.

 

“You can plan your liquidity better than earlier because of the timing,” said Debadatta Chand, managing director and chief executive officer, Bank of Baroda.

 

Between 2014-15 and 2024-25, the annual turnover in the overnight money market increased from ₹281.37 trillion to ₹1,324.05 trillion while the daily average turnover rose from ₹1.17 trillion to ₹5.52 trillion. This growth was driven largely by the expansion of the collateralised segment, whose annual turnover rose from ₹245.27 trillion to ₹1,296.62 trillion, even as the turnover in the call-money market declined from ₹36.10 trillion to ₹27.42 trillion.

 

“Banks will be able to manage their funds efficiently, and this was a pending request from a long time,” said the treasury head at a private bank.

 

“Even when overnight money market rates have fallen below the repo rate, we are seeing funds being parked in the SDF,” he added.

 

The weighted average overnight call-money rate has been trading below the repo rate since April 9. On Tuesday, it settled at 5.84 per cent.

 

The repo rate is 6 per cent.

 

Monday’s data shows banks have parked ₹1.62 trillion with the SDF.

 

Since its inception in April 2022, the SDF has been an important feature of the central bank’s liquidity management framework, replacing the fixed-rate reverse repo as the floor of the LAF corridor.

 

The SDF is in line with global best practices wherein deposit facilities are in the form of non-collateralised deposits.