Money market comes to standstill after RBI measures dry up volume

Informist, Thursday, Sep 28, 2023


By Aaryan Khanna


NEW DELHI – Volume in the money market plunged today despite the Reserve Bank of India keeping foreign exchange, rupee derivatives, and gilt markets open on both Thursday and Friday to smoothen out functioning and settle financial transactions in a non-disruptive manner ahead of the half-year and quarter ending September. Trade volume in the call, triparty repo, and repo markets shrunk to less than a tenth of typical trade days.

The decision was taken by the central bank due to a change in public holiday on account of Eid-e-Milad by the government of Maharashtra to Friday from Thursday.


According to Clearing Corp of India Ltd data, only 8.41 bln rupees worth of trades took place in the interbank call money market, against worth 97.82 bln rupees the previous day. The triparty repo market, which includes mutual funds and a few more participants in addition to banks, saw 272.61 bln rupees of trade against 3.20 trln rupees of transactions on Wednesday.


The Clearcorp Repo Order Matching System had only 29.13 bln rupees of trade against 1.33 trln rupees on Wednesday. Gilt market repo transactions were especially out of favour as the underlying gilt market transactions on the previous trading day still awaited clearance, dealers said.


Market participants attributed this to the additional rules that the RBI had imposed while announcing the changes to market timings. 


"Today is a free day or a holiday, all your trades are going to be settled tomorrow," a fund manager at a mutual fund said. "Obviously, this has not helped anyone except making sure that settlement of both money markets and g-sec auction will happen before the change in quarter."


Settlement of secondary market transactions due Friday remain unchanged, irrespective of the four markets that were kept open today. Dealers have been left disappointed that cash lent under two-day call money transactions on Wednesday, as well as those under the triparty repo window, remain locked up without reversal.


This limited the action in funding markets, while a mismatch remains with other investment actions across the banking industry. Banks have likely trimmed some bond holdings to generate cash, particularly ahead of the quarter-end in a bid to boost their loan books, dealers said.


"The overnight markets are illiquid today, which will pose a challenge for anyone processing inflows and outflows," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. "But I feel volumes are going to bounce back tomorrow, when the cash settlements are processed under the RBI's guidelines."


However, the move did help in ensuring settlement for all transactions, and that market participants across industries will remain compliant with regulatory norms, dealers said. With financial markets shut for an extended period around the quarter-end, banks and officials from mutual funds were jittery that Wednesday's trade would count as the last time to meet regulatory norms and dress up quarterly books of accounts.


Un-collateralised lending, such as call money trades, attracts an additional capital charge for the lender, according to Treasury officials. This typically creates a paucity of lenders in money markets every quarter-end, even without the uncertainty over the norms caused by the change in holiday.


The RBI's notification was successful in calming the market on that front, even as it resulted in both confusion and ultimately a dull day in the funding markets, dealers said.


"Today was a (central) government holiday, so no flows are actually being transacted," a call money dealer at a state-owned bank said. "Banks have enough cash left over to cater for retail demand, and nobody will be able to generate enough liquidity for the trading side."  End


Edited by Deepshikha Bhardwaj


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