A massive liquidity outflow of over Rs 40,000 crore (Rs 400 billion) in the coming weeks is expected to pull back the overnight call rates from the near sub-zero levels to the central bank-desired 6-7.75 per cent range.
The call rate today closed at 0.50 per cent with only a few stray deals being struck over 1 per cent in the morning session.
Banks borrow for a day in the overnight market to meet statutory reserve requirements such as the cash reserve ratio and statutory liquidity ratio.
Over the next two days, Rs 20,500 crore (Rs 205 billion) will flow out of the system following the auctions of government bonds and treasury bills scheduled under the regular borrowing programme and as part of market stabilisation scheme of the Reserve Bank of India.
Next week, advance tax payments by companies are expected to drain another about Rs 20,000 crore (Rs 200 billion) from the system, which is currently flush with liquidity of over Rs 50,000 crore (Rs 500 billion).
The RBI absorbs liquidity from the banking system at 6 per cent and infuses liquidity at 7.75 per cent. The RBI has continued with the cap on absorption under the reverse repo window at Rs 3,000 crore (Rs 30 billion) per day, which was set when liquidity was tight as a measure to ensure banks lend in the call money and not lend to the central bank.
The extreme tightness in liquidity had resulted in some private and foreign banks borrowing in the call market at rates as high as 80 per cent.
The RBI today received bids under the reverse repo window from banks aggregating Rs 87,400 crore (Rs 874 billion), with several of them inflating their bids to try and get a larger allotment since the absorption is capped.
"This liquidity is a temporary phenomenon which is mainly a result of large inflows with no matching outflows during the fortnight. Higher MSS amount, auction of government security and advance taxes next fortnight will suck out the excess liquidity. However, liquidity will not be as tight as foreign exchange inflows chase large IPOs, unless the RBI intervenes," said Hitendra Dave, co-head of global markets at HSBC.
Even after the auction outflows, the market does not feel that the liquidity will be as tight as was seen during the advance tax outflows in March. This is because the RBI has been aggressively intervening in the foreign exchange market so as to prevent the rupee from breaching the 40.50 per dollar level.
More from rediff