Interest rates in the call money market are expected to decrease after RBI Governor Shaktikanta Das urged banks to lend in the overnight market instead of depositing in the standing deposit (SDF) facility.
Since the announcement of the incremental cash reserve ratio (I-CRR) on August 10, the weighted average call rate has been consistently higher than the repo rate.
The repo rate is currently at 6.50%, while the weighted average call rate was 6.74% on Friday. The SDF rate is 6.25%, lower than the call money rate.
Das stated during a post monetary policy interaction with the media on Friday that it is preferable for banks with surplus funds to explore lending opportunities in the inter-bank call market instead of passively depositing funds in the SDF at less attractive rates.
He also emphasized that increased volume of call money transactions would deepen the inter-bank money market and reduce the use of the marginal standing facility (MSF) by deficit banks.
Market participants anticipate that this move will lead to a decrease in the weighted average call rate by approximately 20 basis points (bps). Consequently, the adjustment could result in a decline in the yield on treasury bills and impact debt instruments with maturities up to two years.
The governor expressed dissatisfaction with the current call rates, noting that while banks are accessing the MSF, they are also depositing in the SDF.
A dealer at a primary dealership commented, “Obviously, the liquidity is asymmetric. And, banks should lend and call more rather than accessing a lower return SDF window. 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.”
During the post-policy press conference, Das revealed that banks have borrowed Rs 80,000 crore from MSF, while the total deposits in the SDF amount to Rs 56,000 crore. Market sentiment dampened as a result of this statement, with government bond yields expected to open higher on Monday. Additionally, the rise in US treasury yields may further impact the yields, according to dealers.
“One primary dealership dealer stated, “It will become very difficult for the market to rally. 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.”
On Friday, government bond yields reached a seven-month high, with the yield on the benchmark 10-year government bond settling at 7.34%.