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Surging call rates point to rise in short-term borrowing costs


Mumbai: The central bank’s decision to tighten monetary policy is beginning to bite with interbank call money levels zooming past the policy repo rate by up to 60 basis points, potentially enhancing Mint Road’s challenges of balancing the twin objectives of restraining inflation and boosting growth amid a sustained drainage in liquidity.

Call money, or the rate at which banks lend to one other, Tuesday rose to 5.50%, data from the Clearing Corporation of India showed. The weighted average rate was 5.32%, compared with the policy repo rate of 4.90%, the rate at which banks borrow short-term money from the Reserve Bank of India (RBI). The weighted average call money rate spiked about 86 basis points since mid-July, showed Bloomberg data compiled by ETIG. “Short-term rates have risen more than long term rates with surplus liquidity drying up,” said Anil Gupta, vice president – financial sector at

Ratings. “With the call money surging past the repo and closer to MSF rates, banks’ funding costs are going to go up making it an overall rise in short-term borrowing costs. Corporates now have to brace up for higher cost of borrowings.”

The RBI Tuesday conducted a three-day variable rate repo auction for Rs 50,000 crore, a move which infused short-term liquidity into the banking system for which banks are charged a rate of 5.14 percent.
“Sharp declines in daily banking system liquidity have changed the dynamics of the call money market,” Soumyajit Niyogi, director – India Ratings. “Although the durable liquidity is still high, what is more important for us is surplus liquidity in the banking system. The onset of the festive season and deficit in balance of payments could worsen the situation.”

Surplus liquidity in the banking system dropped to the level last seen before the pandemic. The gauge was at Rs 73,741 crore, showed the latest RBI data dated July 25. Liquidity in the system was high as Rs 8.12 lakh crore at the beginning of the financial year on April 4. Between May and June, the Reserve Bank of India raised the benchmark repo rate by 90 basis points in two monetary policy meetings. Since the end of April, the benchmark bond rose by 25 basis points. During this period, Treasury Bills, or shorter duration sovereign securities, yielded 142-145 basis points higher in primary auctions.

“The Reserve Bank will also remain focussed on orderly completion of the government’s borrowing programme,” RBI governor Shaktikanta Das said on June 8 when the RBI raised the repo by 50 basis points. “Going ahead, while normalising the pandemic related extraordinary liquidity accommodation over a multi-year time frame, the Reserve bank will ensure availability of adequate liquidity to meet the productive requirements of the economy.”



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