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Call rates up as RBI sucks out excess liquidity

Call money rates inched up as the Reserve Bank of India (RBI) sucked out excess liquidity through a term reverse repo auction held on Monday. In the four-day term reverse repo auction, RBI sucked out liquidity worth Rs 2,025 crore from the system, compared with the notified amount of Rs 15,000 crore.

On Monday, the weighted average call money rate was at 7.97 per cent, compared with Friday’s 7.69 per cent. “Due to sucking out of this liquidity, call rates rose today (on Monday),” said a senior official of a primary dealer.

With the intention to fight sticky inflation, RBI, on Friday, announced for the first time a term reverse repo auction. The move was announced just ahead of the bi-monthly monetary policy review scheduled on Tuesday and was aimed at keeping liquidity in the deficit mode. RBI had also said the auction would have a greenshoe option to accept offers up to an additional amount of Rs 10,000 crore above the notified amount. Most banks did not participate, as they felt there are other avenues at higher rates.

However, government bond yields did not react much due to liquidity drain. There was also a thin trading volume in the bond market, ahead of the monetary policy review. The yield on the 10-year bond ended at 8.66 per cent compared with Friday’s close of 8.65 per cent.

However, there are concerns on the bond street that a below-normal monsoon and El Nino might continue to keep the inflation sticky due to which one more rate hike during this financial year cannot be ruled out. “There are concerns of below-normal monsoon and El Nino, but we need more clarity on this as and when it happens. In the next few days, we shall have more clarity,” said the head of treasury of a public sector bank.

Most experts are expecting RBI to maintain a status quo on key policy rates. However, the market has also factored in that RBI’s guidance might be hawkish, as the central bank awaits more clarity from the government on fighting inflation. The repo rate currently stands at eight per cent, while the reverse repo rate is at seven per cent.

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