The overnight interbank call money rate rose to 6.80%, with most of the banks ending up as borrowers, while the rate at which most mutual funds borrow or lend overnight funds, or the TREPS rate, jumped to 6.74%.
The Reserve Bank of India's repo rate stands at 6.50%, while marginal standing facility rate - the upper end of the interest rate corridor - stands at 6.75%.
"A lack of any liquidity support will see more pressure on the overnight and shorter end of the yield curve," said Raju Sharma, head fixed income at IDBI Mutual Fund.
The 182-day Treasury Bill yield was at 7.16%, while 364-day T-Bill yield was at 7.25%, further flattening the bond yield curve amid tight liquidity conditions.
The RBI said it will be conducting 14-day variable rate reverse repo auction on Friday, surprising market participants that were expecting a rollover of the repo rate.
On February 10, the RBI conducted 14-day repo and infused 500 billion rupees ($6.04 billion) in the banking system, which matured earlier in the day, leaving traders to meet cash shortfalls through market borrowings on reporting day.
"Even if there may be inflows lined up, the RBI should have at least given shorter duration repo, especially as market was looking forward to it. Such surprises are bound to create some sort of panic," a trader with a private bank said.
The RBI Governor Shaktikanta Das in his monetary policy address had said, the RBI will conduct operations on either side of the Liquidity Adjustment Facility. Banking system liquidity has stayed in deficit since more than two weeks, with daily average deficit of nearly 300 billion rupees during this period.
"The RBI may be having a better idea about inflows from states as well as the central government and hence must have skipped repo for today, but we continue to expect active infusion going ahead whenever liquidity deficit widens further, said Soumyajit Niyogi, director, core analytical group at India Ratings and Research. ($1 = 82.7250 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)
