Indian banks have expressed their concerns regarding the elevated overnight rates at a recent money markets association meeting. Senior treasury officials revealed that they informally approached the Reserve Bank of India (RBI) for assistance in managing liquidity.
The weighted average overnight call money rate has remained above the repo rate for four consecutive weeks and has even surpassed the marginal standing facility (MSF) rate in the fortnight ending May 19. The weighted average rate for collateralized borrowing, known as TREPS, has mostly aligned with the MSF rate, currently set at 6.75%. Meanwhile, the RBI’s repo rate stands at 6.50%.
During a meeting with officials from the Fixed Income Money Market and Derivatives Association of India (FIMMDA), banks raised concerns about the persistently high overnight rates. However, no formal written communication has been exchanged between the banks and the RBI. A senior treasury official from a state-run bank stated that they have requested the RBI to address the current liquidity imbalance. The general feedback received from the RBI and banks is that upcoming bond maturities are expected to improve the situation.
Both FIMMDA and RBI officials have refrained from commenting on the matter in response to Reuters’ email inquiries.
Another treasury official highlighted that most banks have been borrowing since mid-April due to credit growth and tax outflow pressures, while insufficient inflows have failed to offset the situation.
Despite the appropriateness of conducting a repo auction at this point, traders believe that the RBI is unlikely to do so immediately.
The liquidity surplus in India’s banking system averaged over 550 billion rupees ($6.73 billion) in May. However, a significant portion of the surplus is concentrated in a few large banks, leaving most lenders to rely on market borrowings to meet reserve requirements. Despite the persistence of elevated overnight rates, treasury officials do not anticipate any infusion of liquidity from the RBI, as they expect conditions to improve naturally over time.
VRC Reddy, the treasury head of Karur Vysya Bank, suggested that the RBI may prefer rates to remain between the repo and MSF rates to control inflation. A sharp decline in overnight or short-term rates may not be comfortable for the RBI.
Traders also pointed out that significant inflows of over 1 trillion rupees are expected in the coming days as two government securities mature. Additionally, the RBI’s recent spot dollar purchases have naturally increased rupee liquidity, leading traders to believe that major action from the RBI is unnecessary at the moment.
Furthermore, the market anticipates a substantial surplus transfer from the RBI to the government, which would enhance systemic liquidity through government spending. Traders speculate that this dividend transfer could exceed 1 trillion rupees ($12.23 billion), significantly surpassing the budgeted amount of 480 billion rupees.
