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By Dharamraj Dhutia
MUMBAI, April 7 (Reuters) - India’s central bank is likely to allow overnight interbank rates to stay near the floor of the policy corridor for longer and refrain from draining liquidity to avoid unsettling an already fragile debt market sentiment, bankers said.
Lower overnight funding costs offer some relief to a market contending with the fallout from the Iran war, which has driven up oil prices and stirred volatility in the rupee.
The weighted average call money rate (WACR) has been below 5.10% in April so far and is set to decline further, as liquidity in the banking system has moved into ample surplus. The secured overnight borrowing rate slipped to around 4.80%, highlighting the extent of liquidity surplus.
WACR stayed around 5.10% for most of February and March, and markets had expected the central bank to begin liquidity-draining operations with the start of the new fiscal year in April to bring it back to near the 5.25% policy rate.
The central bank seeks to keep the WACR at or around its policy rate, it said in February.
"Since the RBI tolerated it for the last two months, there is no point in disturbing the markets at a time when a small negative point could trigger a larger selloff in government bonds," a treasury head at a large private bank said, requesting anonymity since he is not authorised to speak to media.
Tightening measures such as variable rate reverse repos do not appear warranted at this juncture, said VRC Reddy, treasury head at Karur Vysya Bank.
"There is little risk in allowing overnight rates to remain near the lower bound of the policy corridor for some more time."
He expects the RBI to maintain a neutral stance at its policy decision due on Wednesday, "without signalling any significant concern".
Liquidity surplus was around 4 trillion rupees ($43 billion), and with nearly 1.2 trillion rupees set to flow in from maturing government securities this week, surplus could hit 2% of deposits — well above the 1% threshold flagged by the RBI in December.
Tanay Dalal, senior vice president for business and economic research at Axis Bank, said that while tightening monetary policy is a valid strategy for currency defence, regulatory and unconventional tools will continue to be deployed instead.
($1 = 92.96 Indian rupees)