Indian lenders decry high overnight rates

Senior treasury officials from Indian banks have raised concerns over high overnight rates and informally approached the Reserve Bank of India (RBI) for assistance in managing liquidity, as discussed during a money markets association meeting. The weighted average overnight call money rate has remained above the repo rate for four consecutive weeks and exceeded the marginal standing facility (MSF) rate in the fortnight ending May 19. The weighted average rate for TREPS, a collateralized borrowing form, has mostly hovered around the MSF rate of 6.75%, while the RBI’s repo rate stands at 6.50%.

Officials from banks held discussions with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) last week to address the issue of persistently high overnight rates. Although there has been no formal written communication, a senior treasury official from a state-run bank stated that they have orally requested the RBI to smoothen the current liquidity position. The general sentiment from both the RBI and banks is that upcoming bond maturities will help rectify the situation.

Despite the elevated overnight rates, treasury officials do not anticipate immediate intervention from the RBI. India’s banking system has experienced a surplus liquidity averaging over 550 billion rupees ($6.73 billion) in May, primarily held by a few large banks. As a result, most lenders rely on market borrowings to meet their reserve requirements. Treasury officials expect liquidity conditions to improve naturally in due course and suggest that the RBI prefers rates to remain between the repo and MSF rates to curb inflation.

The market anticipates inflows of over 1 trillion rupees in the coming days as two government securities mature. Additionally, the RBI’s spot dollar purchases have led to an increase in rupee liquidity, reducing the need for immediate action. Traders also anticipate a substantial surplus transfer from the RBI to the government, exceeding the budgeted amount of 480 billion rupees. This transfer is expected to bolster systemic liquidity through government spending.