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Informist, Wednesday, Jan. 15, 2025

By Siddhi Chauhan

MUMBAI – Cooling of money market rates kept banks from taking part aggressively in the five-day variable rate repo auction conducted by the Reserve Bank of India on Wednesday. This was because the central bank's prior liquidity support through variable rate operations had helped banks meet their liquidity needs, dealers said.

Banks had already borrowed INR 2.25 trillion from the RBI through a 14-day variable rate repo auction on Friday, at a weighted average rate of 6.55%. On Monday, a four-day variable rate repo added INR 500.08 billion to the banking system until Friday at a weighted average rate of 6.53%. With their funding needs met for the week and no immediate outflows on the horizon, banks tendered less than INR 40 billion at the five-day variable rate repo tender on Wednesday, which had a notified amount of INR 750 billion.

"They (RBI) have already infused funds through a repo operation which was conducted on Monday, I don't understand the need of this tender," a dealer at a private bank said. "Had they come up with an overnight operation, demand would have been decent."

Since Monday, the weighted average triparty repo rate has fallen by 12 basis points to 6.37%, while the weighted average call rate has fallen by 34 bps to 6.47%. This is despite the latest data from the RBI showing its net liquidity injected--a proxy for systemic liquidity deficit--was INR 2.09 trillion on Tuesday. Banks said the central bank's measures through foreign exchange operations were also helping to ease liquidity conditions.

The RBI has conducted dollar/rupee buy-sell swaps through this week across tenures, which have infused around INR 300 billion into the banking system, dealers said. The swaps are conducted by the central bank in order to limit the pressure on liquidity caused by its spot dollar sales, which have been needed to protect the depreciation seen in the domestic unit against the dollar over the last two days.

One of the reasons for high overnight rates in the past few weeks was the rise in near-term dollar-rupee forward premiums. As the cost of obtaining rupees by deploying near-term dollars eased, banks converted their dollar holdings to rupees, reducing the need for the RBI's liquidity injection, dealers said.

"The TREPS (triparty repo rate) opened at 6.28%, while in the repo operation the lowest that weighted average rate could be is at 6.51%," a dealer at a state-owned bank said. "Why would anyone risk locking in at a higher rate that too for five days when (money market) rates are expected to remain well below repo rate?"

Going forward, money market rates are expected to be below the repo rate of 6.50% as there are no significant outflows till next week, when payments for goods and services tax will begin. The RBI may need to conduct a variable rate repo when the four-day operation matures on Friday to keep overnight rates anchored or below the policy repo rate, dealers said. On Thursday, inflows of INR 119.96 billion are scheduled to enter into the banking system due to maturity of 6.89% 2025 gilt. With the rupee having its best day against the dollar since Jun. 3 on Wednesday, call market participants are also hopeful the RBI may buy dollars in the spot market in the coming days, helping rupee liquidity through that mode as well.  End

Edited by Ashish Shirke

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