MUMBAI, Sept 28 (Reuters) - India's overnight rates fell after an early panic-driven jump on Thursday, though volumes remained thin after a scheduled market holiday was postponed and due to a persistent tightness in banking system liquidity, traders said.
Trades worth only 8.41 billion rupees were struck in call money market, while the overnight TREPS market for non-bank participants saw trades worth 273 billion rupees till 5:00 p.m. IST on Thursday. The TREPS rate had hit a multi-year high of 7.24% earlier in the day.
Traders said these volumes were likely at multi-year lows. The daily average for those trades stand at 93 billion rupees and 3.59 trillion rupees respectively.
"The TREPS deals struck on Wednesday will get reversed on Friday, so people were not lending in overnight markets today," a trader with a private bank said.
Bond market participants also said the change in holiday schedule impacted demand for debt auction, especially from mutual funds, insurance companies and pension funds, resulting in higher-than-expected yields for three-year and 40-year bonds.
These players are the usual lenders in TREPS.
"Heavy quantum of our cash was blocked in TREPS, so we were unable to participate big at today's auction. Ideally they should have not moved the auction, as Friday is also a working day now," a fixed income officials from a pension fund said.
Late on Wednesday, the western state of Maharashtra state, home to the financial capital Mumbai, shifted a local holiday to Friday from Thursday, while the Reserve Bank of India (RBI) decided to keep money markets open on both days.
However, the RBI said the settlement for deals struck on Wednesday would take place on Friday, according to the original schedule.
"The entire confusion over holidays has also seen banks desperately borrowing from the RBI's Marginal Standing Facility window," a trader with a private bank said.
Banks borrowed 1.966 trillion rupees ($23.63 billion) from MSF at 6.75% on Wednesday, near its record borrowing of 1.971 trillion rupees via this window on Sept. 18.
The banking system liquidity deficit was at 1.20 trillion rupees as of Wednesday. ($1 = 83.1970 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza and Nivedita Bhattacharjee)
