Informist, Tuesday, Feb 6, 2024
By Aaryan Khanna
MUMBAI – Banks are avoiding exploiting the arbitrage between overnight money market rates and the Reserve Bank of India's variable rate reverse repo operations since Friday, treasury officials said. This has led to disappointing subscriptions in three of the four variable rate reverse repo operations since then, the last one at 1230-1300 IST today being an exception.
The weighted average triparty repo has been around 6.30% since Friday, slumping below the policy repo rate of 6.50% suddenly after Feb 1 due to an influx of liquidity. Mutual funds and banks are the largest and most active participants in the triparty repo market. Bank treasury officials said it was mutual funds that were sitting on enough cash to lend out at rates that would be considered throwaway a week prior.
Meanwhile, banks – which are typically borrowers in the triparty market – have also seen their liquidity needs go down due to nearly 2 trln rupees of inflows into the banking system over the past week, including government spending by both the Centre and states. At the variable rate reverse repo auctions, banks can park money with the RBI at rates up to 6.49%, earning a profit of up to 20 basis points on the trade.
On Friday and Monday, the central bank conducted four-day liquidity mop-up operations, but the disappointing turnout and communication from banks led the RBI to conduct only overnight variable rate reverse repo operations today, the officials said. The first three saw less than 40% of the notified amounts picked up, while banks parked 418.04 bln rupees at the last auction, against a notified amount of 500 bln rupees – which may have been at the RBI's behest, the officials said.
"It's likely that the central bank had given a nudge to a couple of players," said a treasury official at a state-owned bank. "The RBI would frown upon borrowing money in the interbank market to make profit (on arbitrage), it would be a breach of fair practice. They (the banks) will be in an awkward spot when the audit comes around."
Banking system conditions have eased to the point where the RBI has turned from overnight fine-tuning operations to infuse liquidity last week, to continuous attempts at withdrawal of liquidity since Friday. One of the major reasons was likely that banks were parking large liquidity surpluses with the central bank under the Standing Deposit Facility at a rate of 6.25%, a practice RBI Governor Shaktikanta Das has publicly discouraged. Banks parked 1.25 trln rupees under the SDF on Monday, the most since Sep 5, RBI data showed.
In addition to the scheduled month-end spending by the government, money market participants have also cited robust collections under systematic investment plans of mutual fund houses and a sizeable outlay by a corporate house, that have contributed to easier liquidity in the financial system. Regardless, banks remained cautious of parking their excess cash with the RBI in the face of excise duty payments due on Wed-Thu, which are likely to draw out around 500 bln rupees from the banking system and may push up overnight money market rates, officials said.
"Some of the less mainstream participants may be doing it (arbitrage)," an official at a private sector bank said. "For the larger banks, it is both a regulatory oversight issue, and there are operational challenges as well."
Explaining the operational challenges, the official said that banks must maintain cash balances in their accounts with the RBI to subscribe to the variable rate reverse repo operation. This does not always line up with the settlement in the interbank market or triparty repo, official said.
Also, some banks don't consider the arbitrage attractive enough to enter into such a trade, as they may reflect poorly on the treasury operations as a whole while making a minimal gain on a day's basis.
"The moment that I make the trade, it has implications for my balance sheet and net interest margins," an official at another private bank said. "On an absolute basis, I will make money, but it hurts the bank's margin if I'm borrowing for only a 20-bps gain when the NIM is 3-4%." End
Edited by Avishek Dutta
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