The average daily call rate has risen to 6.70% between Aug. 14 and Oct. 5, sharply above the 6.49% between June 1 and Aug. 11 and the policy repo rate of 6.5%, which is ideally the anchor for overnight money market rates.
The Reserve Bank of India, in its policy meeting in August, mandated that banks maintain an incremental cash reserve ratio of 10% on some deposits, tightening the rupee's liquidity. That move has since been eased out in phases since September.
"The I-CRR was an indirect rate hike as the RBI had been looking to keep overnight rates closer to the MSF (marginal standing facility) rate," said Arun Bansal, executive director and head of treasury at IDBI Bank.
The I-CRR and tax outflows pushed the banking system liquidity deficit to a more-than-four-year-high of nearly 1.5 trillion rupees ($18 billion) in September.
While market participants expect the RBI to maintain its tight leash on liquidity in the coming weeks, they don't anticipate any drastic measures.
"Any rise in liquidity surplus would be a short-term phenomena and liquidity will drain out due to a rise in currency in circulation, which will pick up pace in the current quarter," said A Prasanna, head of research at ICICI Securities Primary Dealership.
"Till then, they (RBI) can continue with variable rate reverse repos of different tenors and screen-based OMO sales. Forex flows can be managed via forwards."
While banks have not been actively participating in VRRRs, the RBI has net sold bonds worth 71 billion rupees in the open market in the four weeks to Sept. 22.
Meanwhile, the tight liquidity conditions have also had an impact on money market rates, with yields for treasury bills and commercial papers rising over the last few months.
While yields on T-bills sold by the government have gained around 25 basis points, yields on commercial papers issued by non-banking finance companies have risen 35 basis points.
($1 = 83.2075 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Savio D'Souza)
By Dharamraj Dhutia
