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The Reserve Bank of India infused liquidity aggregating Rs 19,000 crore into the banking system through a seven-day term repo auction on Friday.
This is the maiden term repo auction by the central bank. It announced introduction of this auction, whereby banks pledge excess government securities with the regulator to borrow funds for 7 days and 14 days, on October 7.
Against the notified auction amount of Rs 19,000 crore, the central bank infused Rs 19,001 crore into the banking system, at the cut-off rate of 8.80 per cent. To borrow funds for seven days, banks put in bids in the 7.60 per cent to 8.96 per cent range, according to a RBI statement. Banks can borrow up to 0.25 per cent of their deposits under the term repo, provided they have surplus government securities. According to S. Srinivasaraghavan, Head-Treasury, Dhanlaxmi Bank, “The term repo route of funding works out cheaper than borrowing from the call money market or the marginal standing facility. Hence, the incremental cost of funding will be a tad cheaper for banks.”
Market players say there is a catch in the term repo in the sense that once the government securities are pledged with the RBI, banks will not be able to capitalise should the yields on government securities soften. Yields and prices of government securities move in opposite directions. Introduction of the term repo auction is aimed at developing a more reliable term structure of interest rates.
While the 14-day term repo of tenor would be conducted every reporting Friday, the 7-day term repo would be conducted on every non-reporting Friday.
This is the maiden term repo auction by the central bank. It announced introduction of this auction, whereby banks pledge excess government securities with the regulator to borrow funds for 7 days and 14 days, on October 7.
Against the notified auction amount of Rs 19,000 crore, the central bank infused Rs 19,001 crore into the banking system, at the cut-off rate of 8.80 per cent. To borrow funds for seven days, banks put in bids in the 7.60 per cent to 8.96 per cent range, according to a RBI statement. Banks can borrow up to 0.25 per cent of their deposits under the term repo, provided they have surplus government securities. According to S. Srinivasaraghavan, Head-Treasury, Dhanlaxmi Bank, “The term repo route of funding works out cheaper than borrowing from the call money market or the marginal standing facility. Hence, the incremental cost of funding will be a tad cheaper for banks.”
Market players say there is a catch in the term repo in the sense that once the government securities are pledged with the RBI, banks will not be able to capitalise should the yields on government securities soften. Yields and prices of government securities move in opposite directions. Introduction of the term repo auction is aimed at developing a more reliable term structure of interest rates.
While the 14-day term repo of tenor would be conducted every reporting Friday, the 7-day term repo would be conducted on every non-reporting Friday.
Status quo on rates
Meanwhile, with the index of industrial production (IIP) reading coming in at a low of 0.6 per cent for August, the market expectation is that the Reserve Bank may maintain status quo on the repo rate and cut the marginal standing facility (MSF) rate further by about 50 basis points. Currently, the repo rate (the interest rate at which banks borrow funds from RBI) is at 7.50 per cent.
ramkumar.s@thehindu.co.in
Source: thehindubusinessline
ramkumar.s@thehindu.co.in
Source: thehindubusinessline
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