Banking system liquidity in surplus mode, but call rates are on the rise

Overnight call money rates, the interest rates at which banks lend money to each other, are on the rise despite liquidity remaining in the surplus mode.

As per Reserve Bank of India (RBI), the call money rates climbed to a weighted average 6.5% as on Monday from 6.3% on September 7.

One of the roles of the RBI is to maintain enough liquidity in the banking system so that call rates hover around the repo rate — the rate at which RBI lends money to the banks.

Care Ratings in its weekly report for the week ending September 7 wrote: The call money market rate rose by 9 bps in the start of the week, declined marginally for the next three days, following which it ended the week at 6.35%, 11 bps higher than the previous week close. The call money rate rose despite the overall banking system remaining in surplus during the week.

According to the rating agency, the average daily borrowings in the call money market during the week ended September 7 was higher by 28% at Rs 15,631 crore from the average borrowings of Rs 12,218 crore in the previous week.

The major reason for the rise in call rates is the skewed liquidity in the banking system. Large banks riding on higher liquidity based are comparatively in better condition than smaller banks. As a result, in order to keep the mandated 4% cash reserve ratio (CRR), they need to borrow money from larger banks.

Moreover, the rise in call rates, as well as borrowing, is greater towards the end of the week as banks have to report on every alternate Friday that they have maintained the required CRR.