India's call money market, a key funding mechanism for lenders and borrowers, halted trading for 90 minutes at the open on September 3 as a record cash surplus in the banking system dried up demand for short-term loans.
The surplus reached 102.67 billion dollars, according to Bloomberg reporting on the market freeze. Call money markets operate on a day-to-day basis and depend on banks needing to borrow reserves to meet regulatory minimums or fund unexpected outflows. When cash floods the system, borrowers vanish and trading stops.
The Reserve Bank of India manages liquidity through open market operations and standing facilities. The RBI's tools are producing an excess it cannot easily absorb. A 102.67 billion dollar surplus represents nearly 20 times the typical daily volume on India's overnight call money market, which normally turns 5 billion to 8 billion dollars per session.
The freeze lasted from market open until 10:30 a.m. local time. When trading resumed, transactions occurred at rates in the 4.20 to 5.10 percent range, according to official RBI money market data. The RBI has deployed liquidity management operations in recent weeks, but deposits flowing into Indian banks, including foreign currency inflows, have outpaced the central bank's ability to sterilize them.
Call money rates are watched by money market funds and short-term lenders as a benchmark for credit costs across the system. A shutdown in that market, even for 90 minutes, creates uncertainty about the price of emergency funding. Banks cannot hedge their short-term needs if no counterparties are trading.
The surplus emerged as dollar deposits surged into Indian financial institutions, a pattern that began accelerating in August. The RBI has not announced additional drain operations to reduce the excess. The call market freeze is the longest recorded halt since RBI began publishing market operations data in its current format.
The number that decides it is whether the RBI deploys additional tools to drain the surplus before another closure occurs at market open.
