Overnight Funding Rate Hit 5-Week High Due To Cash Crunch; May Deter RBI From Rate Hike: Report

Weighted Average Call Rate (WACR), an overnight funding cost rate the RBI monitors, was at 6.78 per cent on Wednesday, above the upper band of the RBI’s interest rate corridor, at 6.75 per cent

The WACR is the rate at which short-term funds are borrowed and lent in the money market.

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The Reserve Bank of India (RBI) may deter from hiking policy rates in the upcoming monetary policy meeting due to the rising cost of borrowing money, according to a Bloomberg report. The report attributing economists says that funding costs in the country have surged to a five-week high due to a shortage of available funds. The lack of funds is due to banks depositing less money with the central bank, the report said. 

The report said that the Weighted Average Call Rate (WACR), an overnight funding cost rate the RBI monitors, was at 6.78 per cent on Wednesday, above the upper band of the RBI’s interest rate corridor, at 6.75 per cent. The WACR is the rate at which short-term funds are borrowed and lent in the money market. The duration of the call money loan is 1 day. The WACR is used as a benchmark for short-term interest rates in India.

When banks deposit less money with the RBI, the excess cash available in the banking system decreases. This leads to a shortage of funds in the interbank market, which drives up the demand for funds, pushing up the WACR, which is the cost of borrowing funds in the interbank market. In other words, when banks deposit less money with RBI, the WACR increases.

Chief India economist at Deutsche Bank AG Kaushik Das told Bloomberg that the higher overnight rate is almost equivalent to a rate hike, even though the RBI paused in the April policy. That may mean there is no justification for more hikes with the April inflation print also likely to sharply ease.

The report also said that excess cash that banks deposit with the RBI has dwindled to Rs 788 billion, from as high as Rs 9 trillion in 2022. However, it added that the liquidity crunch may ease soon as the RBI’s dollar purchases in the forex market are adding cash and its dividend payment to the government is due. 

Suyash Choudhary, head of fixed income at Bandhan Asset Management told Bloomberg, “The current liquidity tightness phase is being driven by diminishing core liquidity unlike previous recent episodes which were more owing to higher government cash balances. Thus this requires more permanent solutions and cannot be termed as frictional.”