India funding prices rise to a one-month high

BusinessIndia funding prices rise to a one-month high

Date:

As per a recent report, the overnight funding costs in the country have risen above the Reserve Bank of India’s policy rate. This is a symbol that the excess cash in the Indian banking system has been squeezed.

The weighted average call rate is an overnight funding cost rate that the central bank keeps a check on and it has risen approximately 30 basis points since the start of 2023.

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On Wednesday, the rate came to 6.78%, which is just above the upper limit of the central bank’s interest-rate corridor of 6.75%.

The excess cash that banks have with the RBI has reduced to almost $9.6 billion, which is 788 billion rupees. In 2022, the cash was almost as high as 9 trillion rupees. The move of rate hikes was done by the RBI to manage the rising inflation in India. 

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Treasury bills and liquid funds are becoming more attractive option for money managers than cash because of the shortage.

The higher overnight rate is somewhat similar to a rate hike, even though the RBI stopped in the April policy. Experts say that the central bank has no reason to share with the public about the more number of hikes since the April inflation.

Liquid funds and treasury bills are becoming more attractive to the public and the financial and asset management companies are suggesting the same.

But as per the same report, the liquidity crunch may soon be reduced as the RBI’s dollar buys in the forex market are increasing cash and its dividend payment to the government is still pending.

Experts suggest that the move is for the time being and not a permanent solution for the cash crunch.

Treasury bills are nothing but a money market instrument that is being released by the government of India. The bill is released as a promissory note of repayment in the long run. The aim of a treasury bill or treasury note is to get funds that meet the short-term fund needs of the government. In order to purchase treasury bills, one needs to have a Demat account and trading account and trading platform to hold the T-bills or treasury bills. T-bills are available for buying in the primary market wherein the government acquires money by selling T-bills to investors. 

The government’s work is done by the RBI by conducting the auction.

Liquid funds or Liquid Mutual Funds are lent for a time period of up to 91 days. They are mostly given or lent to borrowers who come with a strong financial background and also to the government of India. 

Liquid funds are invested mainly in highly liquid money market instruments and debt securities that are of small period and thus, they provide high liquidity.

For the unaware, liquid funds usually provide a larger rate of return than fixed deposits. They are also less risky than fixed deposits, thus making them a good choice for investors who want to invest for shorter durations and get higher returns on their investments. They also offer good safety and security just like fixed deposits.

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