Mumbai’s Overnight market is Cheaper Than Repo

The overnight call market is trading below the RBI’s policy repo rate. This is a rare situation in India’s monetary landscape. In February, the call rate averaged 5 percent. In March, the daily mean edged up to 5.29 percent. Both rates are still under the 5.25 percent repo rate set by the central bank after its latest easing round.

Why the RBI Keeps Call Rates Low

The RBI has kept the short-end soft by injecting cash through variable-rate repos and 14-day forex swaps. This has tightened system liquidity due to quarterly advance-tax outflows and the RBI’s sustained dollar-sale operations. Traders now read the sub-repo call rate as the first signal of the RBI’s policy trajectory.

Imported Inflation and Exported Demand

Global commodity prices are climbing, pushing India’s imported inflation above 5 percent. Despite this, the RBI is looking past these prints. The central bank’s inflation-targeting framework is symmetric, allowing it to “look through” temporary supply-side spikes when domestic demand remains fragile.

The central bank’s inflation-targeting framework is symmetric, allowing it to “look through” temporary supply-side spikes when domestic demand remains fragile.

Liquidity engineering

The RBI has absorbed roughly ₹1.4 trillion of banking-system surplus via variable-rate repo auctions. This has anchored the marginal cost of funds. The central bank has also sold about $25 billion of foreign exchange, automatically draining rupees from the market.

What a Sub-Repo Regime Means for Borrowers

Corporate commercial paper (CP) rates have slipped 35 basis points since the start of the year. Banks have responded by trimming the one-year marginal cost of funds (MCLR) by 10-15 basis points in March. This suggests that market participants are pricing an extended pause in policy tightening.

The Growth Gambit

Quarterly data show GDP growth slipping to 4.1 percent year-on-year in Q3 FY26. The government has boosted capital expenditure by 28 percent year-on-year between April and February. This fiscal stimulus dovetails with the RBI’s sub-repo liquidity.

Three Market Signals to Watch

• Call-rate volatility: A widening high-low spread beyond 40 basis points would likely prompt the RBI to shift from fine-tuning to outright open-market bond purchases.
• Forex-reserve burn-rate: At the current pace, reserves could cover less than ten months of imports by September.
• Bank credit-to-deposit ratio: Sitting at 78 percent – a 13-year high – any further acceleration could force the central bank to reconsider its repo stance before the December meeting.

Strategic Perspective

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All signs point to the repo rate remaining at 5.25 percent through the October policy review. The RBI’s guidance is expected to shift subtly from “accommodative” to “neutral with an asymmetric bias toward growth.” Overnight rates will only be allowed to drift upward once core inflation consistently falls below 4 percent for two quarters.