Mumbai: The cost of overnight money in India on Friday dipped to its historic low of 0.01% (or just one basis point), indicating a surfeit of liquidity of money supply in the system and prompting the Reserve Bank of India (RBI) to announce auctions of government bonds and treasury bills to mop up excess liquidity. By doing this the central bank has avoided having to increase banks’ cash reserve ratio (CRR), the balance they need to maintain with it, although the money market had been expecting this. RBI has raised banks’ CRR by 1.5 percentage points—from 5% to 6.5%—since December, an action that caused the overnight rate to zoom to 80% in end-March. Banks typically borrow overnight money for a day to tide over their asset-liability mismatches.
After market hours on Friday, the Indian central bank announced auctions of dated securities worth Rs14,000 crore, as well as another auction of Rs6,500 crore worth of treasury bills maturing in 91 days and 364 days. Overall, this will drain Rs20,500 crore from the system next week. However, with Rs4,000 crore worth of treasury bills due for redemption, the net outflow (from the banking system) will be Rs15,500 crore. “This will bring some sanity to the market as we were completely clueless about the central bank’s stance,” said a bond dealer who did not wish to be identified.
Even at 0.01%, there were no takers for overnight money on Friday. “I have not seen the overnight rate dropping to such a low level,” said Nitin Jani of ICICI Securities, a primary dealer that deals in government bonds. The previous low was in April 1997 when the overnight rate had dropped to 0.25%. “However, one should not compare today’s rate with that of the 1990s as RBI was not active in liquidity management at that time,” said a senior banker.
RBI manages liquidity by infusing money into the system at 7.5% through its reverse repo window and draining money at 6% through its repo window. With a surfeit of liquidity in the system, banks have been making a beeline to the RBI’s reverse repo window this week to park an average of Rs50,800 a day. However, RBI does not absorb more than Rs3,000 crore daily. On the other hand, there is no taker from its repo window as the banks are flush with funds.
Commercial banks, mutual funds, insurance companies and corporations lent and borrowed money on Friday at an average rate of 0.0854% at the trading platform of the Clearing Corp. of India Ltd (CCIL), another window for overnight money.
The overall volume of this market was Rs23,550.55 crore and the average rate at which funds were lent was 0.0854% (or 8.5 basis points), within a range of 0.01-0.13%. On the CCIL platform, market players borrow funds pledging government securities under a scheme called collateralized borrowing and lending obligation (CBLO).
In the overnight inter-bank market (another window for overnight money), where only banks can lend and borrow money, the benchmark rate on Friday was 0.78%. Unlike the CBLO, the inter-bank market is an over-the-counter market where money can be borrowed without any collateral. Senior bankers said deals in this market were struck at even 0.50%. The benchmark rate, known as Mibor (Mumbai inter-bank offered rate), is collated by the National Stock Exchange every morning, based on the polled rate of 20-25 commercial banks that actively participate in the market.
Alok Prasad, a bond dealer with another primary dealer, Securities Trading Corp. of India Ltd, said RBI might still not go for a CRR hike as the excess liquidity in the system will go down by mid-June when firms start paying advance tax for the July-September quarter. “Normally, we see an outflow of about Rs20,000 crore on account of advance tax payment. I will not be surprised if RBI prefers to wait and watch before taking any monetary tightening action,” Prasad said.
The origin of the excess liquidity in the system was RBI’s return to the foreign exchange market. The central bank has been seen buying dollars from the foreign exchange market every time the Indian rupee strengthens beyond 40.50 to a dollar. The local currency which has been trading at a nine-year high against the greenback closed on Friday at 40.535 to a dollar.
“The RBI might have bought close to $2 billion (Rs8,200 crore) from the market,” said a foreign exchange dealer with a private bank who did not wish to named. For every dollar RBI buys from the market, an equivalent amount of rupees flow into the system. This means, over the past two weeks, over Rs8,000 crore flowed into the system following RBI’s dollar buying. The redemption of Rs20,000 crore worth of government paper on 28 May also contributed to the excess liquidity.