India’s key money market gets unusually quiet at start of trade
The freeze in activity has implications for monetary policy
India's key overnight money market remained notably inactive at the start of trade, with no borrowing or lending orders recorded in the first 90 minutes of trading on two consecutive days, including Friday, September 4. This unusual silence in the borrower-deficient market is attributed to the record cash surplus in the nation's banking system, which currently stands at a record 10.5 trillion rupees.
The glut of liquidity, largely driven by a US$127 billion inflow under the central bank's capital-raising programme, has left lenders with no pressing need to borrow funds from the market. As a result, trading volumes have plummeted to a one-year low of 59 billion rupees (US$624 million) according to clearing house data. The Reserve Bank of India (RBI) is closely monitoring this situation as the wide divergence between the actual borrowing costs and the central bank's target rate poses challenges for monetary policy.
To address the issue, the RBI is expected to continue withdrawing cash this month and potentially sell bonds in October to reduce the surplus. The current scenario bears resemblance to the pandemic-induced lull in bond trading in 2020, when traders stayed away from the RBI's platform for half an hour after market opening due to lockdown restrictions.
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