Call money rates may ease after RBI guv Das urges to lend in overnight mkt

The SDF rate is 6.25 per cent, which is lower than the call money rate

Interest rates in the call money market are likely to ease after Reserve Bank of India (RBI) Governor Shaktikanta Das urged banks to lend in the overnight market rather than parking in the standing deposit (SDF) facility.

The weighted average call rate has largely remained above the repo rate since August 10, after the announcement of the incremental cash reserve ratio (I-CRR).

The repo rate stands at 6.50 per cent. The weighted average call rate stood at 6.74 per cent on Friday. The SDF rate is 6.25 per cent, lower than the call money rate.

“It is desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates,” Das said during a post monetary policy interaction with the media on Friday.

He said greater volume of call money transactions would not only help in deepening the inter-bank money market but also lower the recourse of deficit banks to the marginal standing facility (MSF).

Market participants expect the move to lead to a fall in weighted average call rate by around 20 basis points (bps). Consequently, this adjustment could lead to a decline in the yield on treasury bills and may influence debt instruments with maturities of up to two years.

The governor expressed displeasure at where the call rates are. He said while banks are accessing the MSF, they are also depositing in the SDF.

“Obviously, the liquidity is asymmetric. And, banks should lend and call more rather than accessing a lower return SDF window,” a dealer at a primary dealership said. “That is why they did not deepen the market. This also means that weighted average call rate will come down. If it does come down on a consistent basis by even 10-15 bps, then you will see that the front end, T-bills will come down,” he added.

In the post policy press conference, Das said that banks have borrowed Rs 80,000 crore from MSF, whereas the total deposits in the SDF are Rs 56,000 crore. The government bond yields are expected to open higher on Monday as the market sentiment dampened. This came after Das said the central bank may conduct open market operations to mop up liquidity.

The rise in US treasury yields may further aid the yields, dealers said.

“It will become very difficult for the market to rally,” a dealer at another primary dealership said. “However, we had the weekend to think about all the implications. At worst, the market will settle here only, and at best, it will recover by 4-5 bps,” he added.

Government bond yields had surged to hit a seven-month high on Friday. The yield on the benchmark 10-year government bond settled at 7.34 per cent on Friday.