RBI to conduct more frequent term repos

Likely to auction govt cash balances to manage liquidity

The Reserve Bank of India (RBI) on Friday came out with a new regime for liquidity management to keep overnight rates close to the repo rate and entice banks to do more efficient liquidity management. Under the revised framework, RBI would conduct more frequent term repos. The central bank could also choose to sell part of the cash balances of the government for liquidity in the system.

The banking regulator has retained the overall borrowing limit under term repo to 0.75 per cent of banks’ net demand and time liabilities (NDTL) and 0.25 per cent of banks’ NDTL for overnight repos.

RBI said starting September 5, variable rate 14-day term repo auctions would be conducted four times during a reporting fortnight — every Tuesday and Friday between 11 and 11.30 AM for an amount equivalent to one-fourth of 0.75 per cent of NDTL in each auction. In the transition period, to ensure that the access to liquidity under these term repos remains equivalent to 0.75 per cent of NDTL at all times, three-day/four-day variable rate term repo auctions of varying amounts will also be conducted between September 5 and September 12.

“From September 16 onwards, the amount auctioned under each 14-day term repo will remain equivalent to one-fourth of 0.75 per cent of NDTL. There will be regular rollovers of maturing 14-day term repos on every Tuesday and Friday,” RBI said on Friday.

The central bank will continue to provide liquidity through the overnight fixed rate repos at the existing rate of eight per cent to the extent of 0.25 per cent of banks’ NDTL. These auctions will be conducted between 9:30 and 10:30 AM from Monday to Friday.

Overnight variable rate repo auctions will also be conducted by the banking regulator. “The auction amount, if any, will be decided by RBI based on an assessment of the liquidity conditions as well as government cash balances available for auction for the day, and will be announced around 2.30 PM,” said RBI. These will be conducted daily from Monday to Friday between 3 and 3.30 PM. RBI might also decide to increase the auction amount based on the evolving liquidity conditions during the day.

“The overnight variable rate repo auctions between 3 and 3.30 PM is a very positive step for the market. If suppose overnight rates spike up during afternoon trades, these auctions will help cool down the rates. This shall help keep overnight rates close to the repo rate of eight per cent,” said Debendra Kumar Dash, associate vice-president (treasury) at Development Credit Bank.

In the recent past, overnight rates had traded even at nine per cent thus making it an expensive affair for banks to borrow money. RBI governor Raghuram Rajan had said in a post-monetary policy conference call earlier this month said: “Our intent is to keep the call money rate close to the policy rate and we will come out very shortly with any measures that we think might be necessary to further this process. We are examining what is required.”

RBI said it would also conduct overnight variable rate reverse repo auctions to suck out excess liquidity. “The auction amount, if any, will be decided by RBI, based on an assessment of the liquidity conditions and will be conducted on days when it is considered necessary. RBI will announce the notified amount during the day and conduct the auction between 3 and 3.30 PM,” it noted.

The central bank will continue with its fixed rate reverse repo auctions. There will be no restriction on the quantity and it shall be conducted between 7 and 7.30 PM from Monday to Friday.

The overnight marginal standing facility will be conducted daily from Monday to Friday between 7 and 7.30 PM. “Individual banks can draw funds equivalent up to excess statutory liquidity ratio (SLR) plus two per cent below SLR,” said RBI.

RBI's export credit refinance (ECR) window shall remain available at fixed repo rate between 10 AM and 5 PM from Monday to Friday and between 10 AM and 1 PM on Saturday. In June, the borrowing from this window was reduced to 32 per cent of eligible export credit outstanding from 50 per cent earlier.