India central bank's operations to keep overnight rates within policy corridor, analysts say

The Indian central bank's measured approach to withdrawing banking system liquidity is likely to keep overnight interbank lending rates between the policy repo rate and the floor of the policy corridor, three analysts said on Friday, allowing some policy transmission.

The Reserve Bank of India withdrew Rs 1 lakh crore ($11.7 billion) from the banking system on Friday through a seven-day variable rate reverse repo, rolling over an operation from last week, despite a rising liquidity surplus.

WHY IT'S IMPORTANT

The RBI cut its policy rate by a steeper-than-expected 50 basis points last month, shifted its policy stance to 'neutral', and stopped liquidity infusions.


It then conducted a liquidity absorption operation on June 27 as overnight rates fell below its policy corridor.

India's policy repo rate, the mid-point of the corridor, stands at 5.50%, while the standing deposit facility (SDF) rate, the floor of the corridor, is at 5.25%.

Market participants are unsure whether the RBI wants to push overnight rates close to the policy rate or if it is comfortable with rates hovering near the SDF.

A spike in market rates could affect the transmission of rate cuts that have not been passed on to borrowers and impact economic growth. MARKET REACTION

The weighted average call (WACR) and weighted average tri-party repo rates (WATR) dipped this week as India's liquidity surplus hit a three-year high at more than 4 trillion rupees.

On Friday, the weighted average call rate rose 5 bps to 5.30%, while the weighted average tri-party repo was at 5.23%, up 11 bps.

KEY QUOTES

"The consistent VRRRs are meant to ensure that the call money rate stays closer to SDF and not breach it. However, for it to trade around or higher than repo rate, the quantum needs to be higher," said Madhavi Arora, chief economist at Emkay Global Financial Services.

Harshal Joshi, fund manager, fixed income at Bandhan Asset Management said: "The only purpose of VRRR is that the overnight rates remain at least at SDF rate. I do not expect the RBI to push the overnight rates to repo, and would be satisfied if these rates remain below SDF and repo."