Synopsis: The weighted average call rate (WACR) rose to 6.68% on Monday, surpassing the Reserve Bank of India’s (RBI) 6.50% repo rate despite an overall liquidity surplus in the banking system. Public sector banks faced liquidity shortfalls, causing uneven distribution in the market. The RBI will conduct a variable rate reverse repo auction (VRRR) to drain excess liquidity.
On Monday, the 'weighted average call rate (WACR)' increased to '6.68%', exceeding the 'Reserve Bank of India's (RBI) repo rate' of '6.50%'.
Despite the overall liquidity surplus in the banking system, public sector banks experienced liquidity shortfalls, leading to this rise, according to money market dealers.
The WACR, which reflects banks’ overnight borrowing costs, was '18 basis points higher' than the repo rate by the close of Monday's session.
On the previous trading day, the WACR was at '6.53%', closer to the repo rate.
Under normal conditions, the WACR tends to ease when the banking system has a liquidity surplus.
However, market participants observed that despite a surplus of 'Rs. 79,806 crore', the uneven distribution of liquidity, especially among public sector banks, resulted in upward pressure on the WACR.
Public Sector Banks Face Shortfall:
Money market dealers attributed the increased WACR to a 'skewed distribution of liquidity', where 'public sector banks', which are typically net lenders in the call money market, encountered 'liquidity deficits'.
This shortfall meant these banks were unable to lend, contributing to the increased borrowing costs in the system.
A bond trader from a primary dealership remarked, "Public sector banks, typically the lenders in the system, are facing a deficit. As a result, there’s a lack of lending activity, which explains why the WACR is '18 basis points' higher than the repo rate."
Surplus Liquidity Conditions:
Despite this disparity, the overall liquidity conditions in the banking system remain in surplus mode.
The 'Reserve Bank of India’s data' showed a surplus of 'Rs. 79,806 crore' in liquidity as of 'September 29', largely driven by an increase in 'government spending'.
Earlier in the month, liquidity dipped into deficit territory due to 'advance tax' and 'GST payments', but it has since rebounded.
To manage this liquidity, the 'RBI' has announced a '4-day variable rate reverse repo auction (VRRR)' of 'Rs. 1.75 lakh crore' to be conducted tomorrow.
The VRRR auction is one of the tools the central bank uses to 'drain excess liquidity' from the banking system, thereby stabilizing overnight interest rates.
Bond Market Reaction:
In the government securities market, the '10-year benchmark government security yield' remained largely unchanged, closing at '6.75%' on Monday compared to '6.77%' the previous day.
The relative stability in yields suggests that bond investors are cautiously observing the liquidity dynamics and RBI's interventions.
In conclusion, the rise in the WACR above the RBI’s repo rate highlights the challenges posed by uneven liquidity distribution in the banking system, particularly among public sector banks.
Despite an overall liquidity surplus, these banks' deficits have pushed borrowing costs higher.
The upcoming VRRR auction signals the central bank's intent to manage this liquidity surplus, ensuring stability in the overnight market.
Investors are watching closely, as the government bond market remains stable, but the outlook could shift depending on future liquidity management actions.
Disclaimer: This article is intended for informational purposes only and should not be considered financial or investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
