Reserve Bank of India's first four-day term reverse repo finds no takers

MUMBAI: The Reserve Bank of India's first four-day term reverse repo found no takers with bids from banks for less than a sixth of the target set at Rs 15,000 crore, indicating there may not be that much liquidity as was assumed by the central bank.

The reverse repurchase option, or repo, is a window through which RBI borrows from banks to suck out surplus liquidity. Lenders lend at 7 per cent, the overnight reverse repo rate. Through the reverse term repo, banks bid for only Rs 2,025 crore at a weight average rate of 7.96 per cent. The cut-off rate was at 8 per cent.

"Through this first-term reverse repo, the Reserve Bank was actually testing the waters for liquidity position," said Ajay Manglunia, head-fixed income, Edelweiss Securities. "The lower acceptance of bids suggests that liquidity is comfortable and has not reached excess levels. People holding excess liquidity would not lend to inter-bank call market as it is unsecured lending with an individual cap on it."

To borrow from the inter-bank call money market, a bank needs to pledge government securities. The overnight call rate closed at 7.97 per cent weight average on Monday.

The Reserve Bank has been intervening in the local currency market to check the rupee’s sharp appreciation against the greenback by way of buying dollars and consequently, injecting rupee liquidity into the system. The rupee has appreciated about 4.5 per cent so far this year, against a fall of 13 per cent in 2013.

This has fuelled speculation that the central bank may have to soon come out with measures like issuing market stabilisation bonds after a gap of four years to curb rupee liquidity arising out of dollar purchases. Overseas investors too are buying Indian equities and debt papers.

“This reverse term repo auction aims at sucking out excess frictional liquidity, which may be due to RBI interventions to check the rupee’s appreciation,” said Ashutosh Khajuria, Head-Treasury, Federal Bank. “Another reason for this auction is not to allow overnight rates to fall at the normal reverse repo level. If they fall around 7 per cent, it is tantamount to notional rate cuts.”

With the weight average rate for the auction pegged at 7.96 per cent, it caters as a floor rate for lenders and therefore, overnight rates are likely to hover around that level. The collateralised borrowing and lending, another short-term instrument, was weighted averaged at 7.94 per cent on Monday.

Typically, liquidity is of two types: friction and structural. The structural liquidity surplus would come from excess dollar inflows into the country. That may be abated either through market stabilisation bonds or open market operations by selling bonds, dealers said.