Typically, the overnight call rate moves in the corridor between the repo and the reverse repo rate. By capping the banks’ access to the repo window at Rs.75,000 crore, RBI is making sure that the call rate rises to the MSF rate or 10.25%. This way, without tinkering with the repo rate, RBI has taken up the market rate.
Now on, the interest rate will remain stable till the daily liquidity deficit in the system is Rs.75,000 crore and once it crosses this threshold, the call rate will shoot up to 10.25%.
It’s pretty evident that RBI wants the rate to go up by tightening liquidity through sale of government bonds. Read More