Overnight call rates hit a 21-month high on Thursday. But first, what is it? The rate at which banks borrow from one another usually for one day (overnight) without any collateral is called call rate.

If banks have government securities to give as collateral, they can borrow from the Reserve Bank of India's repo window or MSF window. However, if they run out of securities they go to the call window. So, in times of deficit, interbank liquidity, call rate can trade above the MSF rate.

So, why did it surge to a 21-month high?

RBI has been draining liquidity through its VRRR (variable-rate reverse repo) auctions. But the immediate problem is that this week companies credit GST amounts to the govt. The government is not spending the money fast enough. and this leads to a sudden drop in liquidity, especially during times of tax outgo.

How did RBI tackle it?

The central bank announced an immediate announcement for a borrowing window of Rs 50,000 crore in a special repo auction. Lately, because of surplus money, the RBI has been holding reverse repo auctions and not repo auctions. In a reverse repo, RBI absorbs surplus cash from banks and in a repo, RBI gives money to banks. So on Thursday, RBI announced a special repo auction to provide money to banks

RBI is also conducting VRRR to drain liquidity, isn’t it?

Yes, there is still about Rs 6.8 lakh crore of excess liquidity in the system. Much of this is locked up in the 14-day variable rate reverse repo (VRRRs) auctions. Usually, banks put in money in the VRRRs only after keeping a buffer, but this time, the sudden tax outgo to govt created a near term liquidity scarcity. However, system liquidity is still surplus.

Did it create arbitrary opportunities for banks? How?

Any bank which calculates system liquidity and aggressively deploys it’s its excess cash could have been caught short. Less efficient banks which allow surplus cash to lie at zero return in their deposits may have benefitted from this sudden and unexpected liquidity scarcity.

How can RBI help banks from getting hurt in such unexpected liquidity dips?

Bankers have requested RBI to bring back a daily fixed rate repo auction. This fell into disuse after Feb 2020, when RBi started ensuring a huge surplus in the interbank system. But now with RBI pumping out liquidity, re-opening the repo window may help say, experts.

(Edited by : Abhishek Jha)

First Published:Jan 21, 2022 5:21 PM IST