RBI auctions shorter-dated repos, easing market worries

MUMBAI (Reuters) - The Reserve Bank of India injected 46.5 billion rupees ($760 million) into money markets on Monday through its first-ever overnight variable rate repo, raising hopes such short-term cash offers would become more regular.

RBI Governor Raghuram Rajan said last week that the central bank would consider issuing more frequent and shorter-dated repos, or cash-for-loans transactions.

The RBI began 7- and 14-day term repos in October, but traders complained that these did not run at regular enough intervals, making it hard for banks to manage their near-term cash needs.

The announcement of the one-day repo was thus seen as a relief, although it failed to push down the overnight cash rate because, analysts said, markets sought more assurance that the RBI intends to use them more often.

After market hours, the RBI followed up with a second announcement of another variable rate one-day repo for 50 billion rupees to be conducted on Tuesday.

"This is still work-in-progress since we don't have a perfect system right now, so this should be seen as a tweak," said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

The RBI set the cut-off for its overnight variable term repo at 8.01 percent, allotting 46.50 billion rupees of the 50 billion rupees it had initially announced.

Overnight variable rate repos provide one-day cash infusions at rates set by the RBI after receiving bids from investors.

The overnight cash rate has been volatile and often well over the central bank's benchmark rate of 8.00 percent through much of the year.

Traders have attributed the tight cash conditions to reduced government spending, and said the problem had been magnified by what they see as inconsistent infusions of 7- and 14-day term repos by the RBI.

The overnight cash rate ended at 8.60/8.70 percent on Monday, higher than Friday's 8.35/8.40 percent.

(1 US dollar = 61.1700 Indian rupee)

(Reporting by Neha Dasgupta; Editing by Rafael Nam/Ruth Pitchford)