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RBI to conduct term reverse repo auction

LiveMint logoLiveMint 30-05-2014 Anup Roy

Mumbai: The Reserve Bank of India (RBI) will for the first time conduct a term reverse repo auction, or an auction to remove excess cash from the banking system, of more than one day.

In a notification on its website, the central bank said it will be conducting the four-day term reverse repo auction of `15,000 crore on Monday, the eve of RBI’s monetary policy review.

The central bank will have a so-called greenshoe option to accept offers up to an additional amount of `10,000 crore above the notified amount.

Offers above the existing repo rate of 8% will be rejected, the central bank said.

While the liquidity situation has improved considerably in the system, following anaemic credit growth and dollar purchase by the central bank, not all banks are awash with liquidity.

On a net basis, banks have borrowed an average of `26,233 crore from the market since the start of the calendar year. In the same period, they have parked `4,532 crore of their excess liquidity with the central bank.

On Friday, banks borrowed `6,159 crore from RBI, and kept `2,778 crore of their excess liquidity with the central bank.

Bond dealers say the term reverse repo auction may not have to do much with the existing liquidity scenario.

“With this, RBI could be establishing a floor and ceiling for the term repo market. This is a proactive step by the central bank to develop the term repo market,” said N.S. Venkatesh, head of treasury at IDBI Bank Ltd.

The term money market is the standard by which banks in developed market borrow from and lend to each other. In India, a standard term repo market is missing, which governor Raghuram Rajan has been trying to establish.

“It will take time to get established in our local market, but with the floor and ceiling rates being fixed, the term repo curve corridor can be established and banks can use this as benchmark for their interbank dealings,” said Venkatesh.

The term rates can be taken as the benchmark for issuing certificates of deposits, or short-term debt papers, by the banks in future.

According to a bond trader with a foreign bank, it is the best time to develop the term repo market as rates are not volatile and overnight call rates and other money-market instruments have stabilized as RBI wished for and are closely following the central bank’s repo rate.

While banks may not have `10,000 crore to offer to RBI, the liquidity in the system has eased considerably in the recent past as the central bank bought huge amount of dollars that flowed into the market following the general election.

In March alone, RBI bought a net $7.8 billion of dollars from the market, latest data from the central bank showed.

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