With the Indian consumer spending more during the festival season and demanded more cash, this has pushed up the short term money market rates. This is happening at a time when interest rates are supposed to soften since the central bank is reducing its policy rate.
As a result, banks are expecting the central bank to provide some comfort by infusing more money into the banking system in the fifth bimonthly monetary policy review scheduled 1 December.
Typically, there are outflows to the tune of Rs 50,000 crore during the festival season but this year the amount was 15-20 per cent higher. “This has resulted in the call money rates moving over 7 per cent mark on some days,” said a dealer.
Bankers said since the Reserve Bank of India (RBI) has taken an accommodative monetary policy stance and reduced policy interest rate by 125 bps in 2015 – which is now at 6.25 per cent – it could address the liquidity issue by pumping in more money into the system by open market purchase of bonds.
The central bank aims the overnight rate to hover around the repo rate which is 6.75 per cent.
Apart from increased consumer spending, government’s cash balances with the Reserve Bank of India (RBI) has also increased – meaning the government is spending less as compared to what it did during the first half of the financial year – hence lesser amount of cash is coming to the system.
Foreign investors are also pulling out the country and investing in lesser risky assets with the US Fed is believed to be on course for a rate hike in December. “Liquidity has become somewhat tighter due to the outflows, which has also put pressure on rupee,” said Hariprasad M. P. Senior Vice President & Head – Treasury & Banknotes Business with Centrum Direct. (End)
