RBI to conduct reverse repo and MSF operations on Saturdays

In a bid to tide over liquidity issues of banks in weekends, the Reserve Bank of India (RBI) has decided to conduct reverse repo and Marginal Standing Facility (MSF) operations on all Saturdays with effect from tomorrow.

"The reverse repo and MSF operations conducted on Saturdays will ordinarily be for a tenor of two days with reversal on the following Monday. In case Monday is an (Real Time Gross Settlement) RTGS holiday, the reversal will take place on the next RTGS working day," said RBI on Friday.

Banks have been requesting RBI to conduct repo auctions every Saturday. Instead RBI decided to infuse liquidity through MSF -- a facility which could be availed by banks by paying a higher rate. MSF is fixed 100 bps above the repo rate -- at 8.75 per cent.

Reverse repo is the rate at which the banks park their excess liquidity with the central bank. At present the repo rate is at 6.75 per cent.

The timing of the operations on all Saturdays will be between 2.00 p.m. and 2.30 p.m. Earlier this month on February 7, call money rates had inched up to 25 per cent while Borrowing and Lending Obligation (CBLO) rates jumped to a day's high of 76 per cent.

"That day overnight rates inched up sharply. Very same day bankers had approached RBI to do something about the liquidity tightness faced by banks on Saturdays. Now this window will help to tide over the liquidity problems faced by banks," said the head of treasury of a state-run bank. Overnight rates have come down since then which closed at 7.64 per cent today.

Banks have been facing liquidity issues for quite some time due to which they had been asking RBI for a liquidity window on Saturdays. In fact even on February 7 RBI had decided to offer funds to the banks for two days through MSF. .

"This is a very good measures because overnight rates will be under check even on Saturdays. Earlier after the reporting Friday banks used to keep very less balances and at times in the next day there used to be liquidity issues. Now such liquidity tightness will not happen," said the treasury head of a large state-run bank.

RBI had said in various occasions that they want the call money rates to hug the repo rate. The repo rate currently stands at 7.75 per cent.

Liquidity has been tight also because of lack of government spending. With the corporate advance tax payment deadline approaching in March, liquidity may tighten further.