Longer-term repos may not serve the purpose

Experts differ with Patel panel proposal of 56, 84-day term repos

A Reserve Bank of India (RBI) panel’s recommendation to introduce 56- and 84-day term repos may not benefit much in developing a term-repo curve, as the market has 91-day Treasury bills (T-bills).

The Urjit Patel committee’s report that sought to revise and strengthen the monetary policy framework said as the 14-day term repo rate stabilised, central bank liquidity should increasingly be provided at the 14-day term repo rate and through the introduction of 28-day, 56-day and 84-day variable-rate auctioned term repos by further calibrating the availability of liquidity at the overnight repo rate, as necessary.

Ashutosh Khajuria, president (treasury), Federal Bank, said, “You already have a point on term curve due to 91-day T-bills auction every week. So, these 56-day and 84-day term repo auctions may not be needed. The 14-day, 28-day and 42-day term repos will serve the purpose. There is no need for every point on the term curve. The curve can be constructed with 14-day, 28-day and, straightaway, 91-day T-bills. Besides, you also have overnight rates. After that, there are 182-day and 364-day T-bills which can be used to construct the term curve.”

To boost liquidity in the system, RBI has already introduced seven-day, 14-day and 28-day term repos. The seven-day and 14-day term repos were started in October, initially for 0.25 per cent of net demand and time liabilities (NDTL) and, subsequently increased to 0.5 per cent of NDTL of the banking system. Last week, the 28-day term repo was conducted for the first time. “Most of the essential tenures for term repos are already present in the market. Besides, 91-day T-bills can be used in developing a term curve,” said a treasury official of a state-run bank.

However, a few experts believe 56- and 84-day term repos are needed to develop the curve, as term repos are different from T-bills. “Bills and term-repos are different instruments. RBI probably wants to develop a term-money market and that should not be combined with T-bills because these are statutory liquidity ratio instruments. By making repos of various tenures, it will help develop a term money market that we have always been talking about, but has never been done so far,” said Anoop Verma, vice-president (treasury), Development Credit Bank.

IN A NUTSHELL

• RBI had introduced 7-day, 14-day and 28-day term repos to boost liquidity
• The term repos helped to keep short-term rates hovering in the range of repo rate and marginal standing facility
• As per RBI panel, objective should be to develop a spectrum of term repos of varying maturities with the 14-day term repo as the anchor