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How can the overnight call rates be so low compared to the market interest rate?

• When the RBI has a repo rate of 6% and a reverse repo rate of 7.5%, one would expect the overnight call rate among the banks to be somewhere between 6% and 7.5%. I believe the current very low levels of the call rate is because of the RBI using the repo window to suck liquidity only to a limited extent of Rs 3000 crore / day. What i dont understand is how the call rates can be as low as 1% (the 1% is for interest charged per annum right?). Isnt this cheap money for the banks then? Why not borrow cheap and park them in treasury bonds or liquid mutual funds? How can the overnight call rate be far off from the market interest rate irrespective of the repo and reverse repo rates and the amount of money the RBI actually does borrow from the commercial banks?

• Answer:

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