Welcome Return Of Repos

Repos, on the other hand, score for two reasons. Firstly, since it is a repurchase transaction, banks only park their surplus funds (in return for paper) for a limited period. Secondly, since repos are auctioned, the interest rate signal is transmitted all over the financial system. The RBIs inclination to jump-start the repo market is therefore understandable. It desperately needs to lend a floor to call money market rates, which fell to low levels of 1-2 per cent after the CRR cuts were announced. Such low rates send out a distorted message regarding the cost of investible funds. The moral hazard in low rates is that it encourages banks into building up large asset-liability mismatches borrowing at 3 per cent and lending at 15 per cent which the RBI has always warned banks against. A calculated moderation in the liquidity position in the system is not only desirable, but also warranted. The RBI must not waver in introducing this new monetary instrument. For this could finally see the emergence of a central bank rate.