Mumbai: Borrowing costs in the banking system eased sharply on Friday, exhibiting movement equivalent to a rate cut by the Reserve Bank of India, as the rate for the most widely used overnight funding instrument by banks fell much below the central bank’s policy repo rate.
A large quantum of short-term liquidity infusions by the RBI and a resumption of government spending brought down money market rates, with the central bank’s recent actions suggesting it is tolerant of gradually relaxing its tight grip on banking system funds and letting borrowing costs ease. Since August, banking system liquidity has broadly been at a large deficit, pushing up borrowing costs across the economy.
On Friday, the weighted average rate on tri-party repos closed at 6.32%, almost 20 basis points lower than the RBI’s repo rate of 6.5%, Clearing Corporation of India (CCIL) data showed. In theory, overnight rates are supposed to be closely aligned with the repo rate, which is the rate at which the RBI lends to banks.
Volumes for tri-party repos are the highest among all the segments in Indian money markets. On Friday, trades worth ‘3.5 lakh crore were reported in the tri-party repo segment, far higher than ‘1.6 lakh crore for interbank repos and ‘11,496 crore for the interbank call money market. The weighted average call rate (WACR) closed at 6.56% on Friday. For the last few months, it has largely hovered around 6.75%.
“Even after the last RBI policy, our reading of the statement was that their communication on liquidity was perhaps a little softer. To us, that meant that they would want to prevent very large deficits and start doing variable rate repo auctions. They have done that-it’s because government spending was not happening that liquidity fell into large deficits last month,” said Sakshi Gupta, principal economist, HDFC Bank.
