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    Overnight money market faces big swings in rates

    Synopsis

    These transactions can be done for various duration ranging from overnight to as long as 365 days.

    moneyAgencies
    To the contrary, some of the banks in the call market were borrowing at steeply higher rates than what the RBI’s overnight rates were.
    Mumbai: Interest rates in the overnight money market have become bizarre. While they are rising for some banks than what has been the norm, in another segment of the market, interest rates have fallen to near zero.

    The past two weeks have witnessed two contrasting events in the market where there is abundance of liquidity, the risk aversion to lend to some counterparts is creating a shortage for others.

    While excess liquidity in banks has resulted in the Reserve Bank of India (RBI) absorbing record amounts in reverse repo, where banks park surplus with RBI, similar position with mutual funds (MFs) has resulted in near-zero market rates for some in the socalled TREPS market.

    Transactions in the overnight triparty Repo Dealing and Settlement (TREPs) are being done by banks, mutual funds, NBFCs and others with government securities as collateral. These transactions can be done for various duration ranging from overnight to as long as 365 days.

    Last week saw a transaction at 0.02 per cent where a mutual fund is supposed to have lent money at that rate for a borrower who pledged government bonds as collateral. This compares with the RBI charging 4.4 per cent to lend to banks in the repo market, after Friday’s reduction of policy rates by 75 basis points. A basis point is 0.01 percentage point.

    Mutual funds are seeing a surge in inflows into their overnight funds as investors prefer shortterm funds instead of slightly longer duration liquid funds which invest in commercial papers and corporate bonds maturing in one year or less. “Overnight deployment opportunities in collateralised space is now limited barring TREPS,” said Kumaresh Ramakrishnan, CIO-fixed income, PGIM India Mutual Fund. “With liquid schemes facing heightened volatility, overnight mutual fund schemes have turned popular. Safety of investment is more important than returns now. Some of our liquid scheme customers are opting for overnight funds to tide over this phase prompting us to deploy money via TREPS.”

    Overnight Money Market

    Although this market is just a tiny portion of the money markets, it sends signals on the risk aversion of investors.

    To the contrary, some of the banks in the call market were borrowing at steeply higher rates than what the RBI’s overnight rates were.

    Last week until the sudden RBI announcement, in the inter-bank call money market, an unsecured lending and borrowing platform, the rates have hovered in the range of 5.10-5.75 per cent until the sudden RBU announcement.

    The RBI pumping in liquidity has helped though.

    After advancing the Monetary Policy Committee meeting last week, RBI further eased liquidity measures that would see ₹3.74 lakh crore more into the system.

    “Getting banks that access TLTRO (targeted long-term refinancing operation) to invest in corporate bonds under held-tomaturity (HTM) category aided to lift investor confidence,” said B Prasanna, group head of global markets at ICICI Bank.

    “Overnight rates nearly dropped to zero in TREPs as many mutual funds are now lending in this market with investors in MFs shifting from liquid funds to overnight funds.”



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

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