Overnight rates dip as government spends boost bank liquidity
ADVERTISEMENT The weighted average call rate (WACR), which acts as the operative rate for monetary policy transmission, closed at 5.35% compared to previous close of 5.39%, while TREPS (tri-party repo dealing system) rate fell from 5.32% to 5.26%, close to the lower end of the liquidity adjustment facility (LAF).
Bank treasury officials said that month-end spending by the government, in the form of payments to pensioners, contractors, and even salaries to employees, is expected to add to the liquidity surplus this week. Liquidity surplus in the banking system currently stands at ₹2.48 lakh crore, close to the central bank's target of 1% of NDTL (net demand and time liabilities).
The central bank aims to keep overnight rates within the LAF corridor, which has the marginal standing facility (MSF) rate, currently at 5.75%, as its upper bound (ceiling) and the SDF rate, currently at 5.25%, as the lower bound (floor). The policy repo rate of 5.50% sits in the middle of the corridor. State spending-driven flows are revolving in nature and add to liquidity surplus. However, the surplus drains out once the monthly GST and other tax payments start in the middle of the month.
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