How to read our overnight silver market signals

With the tightening of liquidity conditions by the Reserve Bank of India to counter the growing inflationary trend in the country, the overnight interbank money rates have risen. This has led to increased short-term borrowing costs for businesses. Mint analyzes the impact.

What is overnight money and why do banks need it?

Call money is the borrowing or lending of unsecured funds for a short term period and is used for interbank transactions. It serves the day-to-day cash needs of banks and the rate at which these transactions take place is the call rate. In order to meet the cash reserve ratio and statutory liquidity ratio requirements and to meet sudden demands for funds, banks borrow from the overnight money market. The prevailing liquidity conditions influence the overnight cash rate, i.e. tighter liquidity conditions cause the overnight cash rates to rise and vice versa. RBI, banks and major traders participate in the overnight money market.

How is the overnight money rate different from the repo?

Overnight cash is a short-term financing option with a maturity of 1 to 14 days. When a loan takes place for a period of one day or for one night, it is called “overnight money”, while if the loan is for two to 14 days, it is called “notice money”. . The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks against securities such as treasury bills to meet their short-term fund requirements. It is one of the main monetary tools of the RBI. The weighted average call rate, which is the unsecured segment of the overnight money market, is generally closely aligned with the repo rate.

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Why are overnight money rates making headlines?

The Liquidity Adjustment Facility, an interest rate corridor, has the interest rate on the Marginal Standing Facility (MSF) as the upper limit (ceiling), the overnight fixed repo rate as the limit lower (floor) and the repo rate in between. The RBI tightened liquidity conditions to control inflation, which pushed the overnight money rate above the repo rate.

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What do rising overnight cash rates indicate?

The demand for bank loans has increased due to the economic recovery. In the process of meeting higher loan demand, banks faced systemic liquidity asymmetry in meeting reserve ratios. In order to avoid penalties or being blacklisted, banks are forced to resort to interbank loans. With the increase in the number of banks at the fault line, the overnight money rate for overnight borrowings began to rise, also leading to higher short-term borrowing costs for businesses.

What could be the political approach now?

There is a shortage of liquidity in the market now, compared to the excess liquidity a year ago. Given the improvement in the marginal efficiency of capital – since corporate units are not averse to the rising cost of borrowing – the RBI could explore a liberal monetary policy approach or slow policy tightening. Additionally, with retail inflation falling in July and commodity prices falling, the RBI may consider ensuring that adequate liquidity is available to meet the economy’s production needs.

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