Informist, Friday, Feb 2, 2024
MUMBAI – The Reserve Bank of India’s announcement to conduct a four-day variable rate reverse repo auction today left the money markets perplexed, as liquidity in the banking system was in a deficit of over 2 trln rupees. Dealers said this was prompted by the slump in the weighted average triparty repo rate for two consecutive days.
At the variable rate reverse repo auction, banks parked only 39.75 bln rupees at the cut-off rate of 6.49%, as against the notified amount of 500 bln rupees.
The weighted average rate for triparty repo was at 6.36%, against 6.58% on Thursday, and 6.70% on Friday. Some call market dealers said that is an indication that the RBI is not comfortable with money market rates falling below the repo rate. Currently, the repo rate stands at 6.50%.
“TREPS rate have been falling sharply for the last two days, and the banks have excess money parked with the RBI. So, the overnight liquidity condition in the market is not that bad,” a dealer at a state-owned bank said. “Even though it comes unexpectedly, the government month-end spending and other inflows should be able to help the liquidity.”
At the end of trade on Thursday, the liquidity deficit in the banking system was at 2.22 trln rupees, as against 2.29 trln rupees at the end of trade on Wednesday, according to the RBI data.
Some market participants said this is a balancing act by the central bank to suck out the more than required liquidity. Currently, 2.5 trln rupees infused by the RBI through a 15-day variable rate repo auction is outstanding, which is almost 300 bln rupees more than the liquidity deficit in the banking system now. On Jan 25, when the central bank conducted the 15-day variable rate repo auction, the liquidity deficit was 2.67 trln rupees.
A section of the market said the triparty repo rate fell majorly due to mutual fund activity, as they are usually the majority of the participants in the market. However, other participants see it as a result of banks having comfortable cash with them, which is also reflected in the lower use of the central bank’s marginal standing facility. Today, the marginal standing facility reversal drew out 74.71 bln rupees from the banking system.
Another way to look at it is that the central bank diminished any hope of change in policy stance in the Monetary Policy Committee’s meeting next week, dealers said. At the policy review, some traders had expected a change in policy stance to ‘neutral’ from ‘withdrawal of accommodation’. This came against the backdrop of multiple variable rate repo auctions conducted by the RBI, dealers said. End
Reported by Nishat Anjum
Edited by Avishek Dutta
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