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Informist, Thursday, Feb. 13, 2025

 

By Siddhi Chauhan

 

MUMBAI – Banks are using cheap funds from the Reserve Bank of India's daily variable rate repo auctions and the triparty repo market to exploit the arbitrage created by the central bank's heavy dollar sales. This has, in turn, pushed up overnight money market rates since Wednesday despite the RBI ramping up its rupee liquidity support.

 

The central bank is estimated to have sold over $15 billion in the domestic spot market on Monday and Tuesday. These sales, settled on Wednesday and Thursday respectively, would translate to a rupee liquidity drain of around INR 1.3 trillion, dealers said. With rupee liquidity in short supply and a glut of dollars, the implied overnight cost of deploying dollars via foreign exchange swaps peaked at over 10.5% on Thursday.

 

The trade has become even more lucrative as the spread between the triparty repo rate and overnight dollar/rupee forwards, or cash-tom, widened after the central bank's Monetary Policy Committee cut the repo rate by 25 basis points to 6.25% on Friday. The triparty repo started trading in the band of 6.20% to 6.35% against 6.40% to 6.55?fore the rate cut. Banks are happy to exploit the nearly 400 basis points of arbitrage they gain on an overnight trade.

 

"There's a surplus of dollars, while RBI has not done enough of receiving in forwards to bring down cash-tom levels," a head of balance sheet management at a private bank said. "The wound (on rupee liquidity) is too deep to be fixed immediately, but the arbitrage has been created and is being received by banks."

 

For participants who have access to the RBI's daily overnight variable rate repo auctions, this has created a steady source of demand for dollar/rupee buy/sells in the overnight FX market, funded easily by liquidity support. The VRR auctions, which on Thursday rose to as large as INR 2.75 trillion, have seen a cut-off of 6.26% over the last two days. Banks and primary dealerships both have access to these auctions.

 

The trade has been a regular in the arsenals of balance sheet managers across banks, although they are usually treated to spreads within 100 bps. Banks have rushed to jump at this opportunity. The triparty repo market saw trades as high as the marginal standing facility rate of 6.50% on Thursday, and even the demand at the daily VRR auction was higher than expected.

 

"Today, rates in the forex market are beneficial, so maybe they (banks) are borrowing from TREPS and lending in overnight foreign currency," a dealer at a state-owned bank said. "The spread between TREPS and overnight US dollar rates is high. Doing this, they are getting a high premium, it is because of this arbitrage that the rates have risen." 

 

Going ahead, traders said they will continue to get such opportunities, although the market will correct itself once more players join the fray. The cash-tom rate on Thursday ended at an implied 7.7%. The RBI is seen selling dollars to protect the slide in the rupee, which hit a record low of 87.95 a dollar earlier this week. At the same time, it has promised to conduct daily variable rate repo auctions until further notice to meet the demands of the domestic economy.  End

 

US$1 = INR 86.8975

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

(With inputs by Aaryan Khanna)

 

Edited by Saji George Titus

 

 

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