The overnight funding costs in India have experienced a significant rise, surpassing the policy rate set by the central bank. This indicates a depletion of excess cash within the banking system.
The weighted average call rate, which is a rate for overnight funding costs monitored by the central bank, has increased by approximately 30 basis points since the beginning of the year. Currently standing at 6.78% on Wednesday, it is slightly above the upper limit of the Reserve Bank of India’s interest-rate corridor, which is set at 6.75%.
The amount of excess cash that banks deposit with the Reserve Bank of India (RBI) has decreased to 788 billion rupees ($9.6 billion), compared to its peak of 9 trillion rupees in 2022. This decline can be attributed to the series of interest rate hikes implemented by the central bank to address inflation. As a result, money managers are finding shorter-term instruments such as treasury bills and liquid funds more appealing due to the prevailing tight liquidity conditions.
According to Kaushik Das, the Chief India Economist at Deutsche Bank AG, the increased overnight rate is comparable to a rate hike, despite the Reserve Bank of India (RBI) pausing its policy in April. Das suggests that this could imply that further rate hikes are not warranted, especially considering the anticipated significant easing of inflation based on the April data.
Bandhan Asset Management Ltd. acknowledges that treasury bill rates have reached appealing levels, signalling potential investment opportunities. On the other hand, Quantum Asset Management Ltd. is recommending shorter-term investors consider purchasing liquid funds as a favourable option.
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