RBI to conduct variable reverse repo auction for Rs 2 lakh cr

Weeks after warning about potential instability due to an unsustainable hole in the price of extremely short-term cash, the Reserve Bank of India (RBI) Friday sought to haul depressed in a single day market charges towards the coverage price by signalling its intent to purchase Rs 2 lakh crore in a 14-day reverse repo transaction.

It would conduct an auction on Jan. 15 to take from banks the surplus money that has pushed the in a single day charges means under the reverse repo price, which banks get for parking extra money with the banker of final resort.

“On a review of the evolving liquidity and financial conditions, it has been decided to restore normal liquidity management operations in a phased manner,” the RBI mentioned.

The financial coverage committee (MPC) of the central financial institution expressed considerations about potential instability within the monetary system due to short-term charges remaining depressed for lengthy.

In the previous two months, rates of interest within the in a single day market fell to a low of three.10%, making the RBI’s reverse repo price of three.35% ineffective. Furthermore, the central financial institution has stored repo charges at 4%. In the in a single day market the place mutual funds additionally take part, the speed dropped to 2.57% earlier in December.

“The latest announcement by RBI (on reverse repo auction) should realign the short-term rate that has long traded much below than the benchmark rate,” mentioned Soumyajit Niyogi, affiliate director at India Ratings.

“The move suggests calibrated departure from ultra easy monetary policy,” he mentioned.

Money market merchants now anticipate in a single day charges to rise considerably subsequent week. The central financial institution might take extra measures to suck out extra money from the banking system that has a surplus of about Rs 6 lakh crore.

Much of the collapse in cash market charges has been attributed to the flooding of money due to RBI’s buy of US {dollars}, which aggregated a couple of hundred billion because the breakout of the pandemic, taking the reserves to a file $578.5 billion.

“The excess liquidity is from foreign exchange flows, both through FDI and FII,” RBI governor Shaktikanta Das had mentioned.

“We are fully aware of the downside risks. The various instruments at our command will be used at the appropriate time, calibrating them to ensure that ample liquidity is available to the system.”