RBI liquidity drain pushes call money rates higher, aiding policy transmission

The weighted average call money rate rose 12 basis points to 5.43 per cent on Monday, up from 5.31 per cent on October 9, according to data from the Clearing Corporation of India, following the central bank's announcement of liquidity-draining measures last week.

The RBI's toolkit included increasing the daily Cash Reserve Ratio maintenance limit to 99 per cent and conducting bond sales through open market operations. Money market experts believe these steps will strengthen the transmission mechanism of policy rate increases by tightening conditions in the interbank lending market.

Excess liquidity in the banking system has long posed a challenge to monetary policy implementation. When banks have abundant funds available, they reduce reliance on market borrowings and face diminished pressure to raise deposit rates competitively. This reduces banks' incentive to increase lending rates for customers, potentially blunting the impact of RBI rate hikes.

By draining surplus liquidity, the central bank aims to restore equilibrium in the money market and ensure that its policy rate adjustments flow more efficiently through to retail and corporate borrowers. The modest 12 basis point increase in call rates signals the early stages of this liquidity adjustment, with further impacts likely as the measures take full effect.