RBI might announce liquidity tightening steps

While the central bank wants call money rates to hug the repo rate, it has occasionally fallen below repo

In the third bi-monthly monetary policy review to be announced next month, the Reserve Bank of India (RBI) might announce liquidity tightening steps like longer tenure term reverse repos as the central bank had always wanted call money rates to hug the repo rate, while in recent times on certain occasions it has fallen much below the repo rate.

The repo rate or the rate at which banks borrow from the central bank currently stands at 7.25 per cent while call money rates had on certain days moved even below the 7-per cent mark. For example on July 21, the weighted average call money rate had dived to 6.84 per cent.

“I would expect RBI to reiterate that they would like to see overnight rates closer to the repo rate. RBI will continue to do more of term reverse repos and in the monetary policy they may announce that they would decide to do term reverse repos of longer tenure,” said S Prabhu, head of fixed income at IDBI Federal Life Insurance. Prabhu added the central bank might also decide to revive the market stabilisation scheme if the liquidity becomes humongous. “Under this, they can issue additional treasury bills or shorter tenure government bonds to suck out liquidity,” said Prabhu. Term reverse repos were introduced by RBI in June 2014 and so far it has ranged in the tenure of four-five days. These are used to suck out liquidity from the system and the last term reverse repo auction was done in January 2015 and it was of a five-day tenure.

“RBI may announce longer term reverse repos of up to 28 days in the monetary policy review. The other possibilities are that they may continue to go for more open market operation sale or auction of cash management bills. The comfortable liquidity has been because government had spent quite a bit, there have been bond redemptions and RBI had intervened in the foreign exchange market through the spot route,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund. Earlier this month, due to ample liquidity in the system, the central bank had conducted OMO sale of government bonds for a notified amount of Rs 10,000 crore but ultimately Rs 8,270 crore was sucked out of the system. RBI’s liquidity tightening stance had stumped the Street as a result of which bond yields had risen.