Home >News >India >RBI drains 2 tn of liquidity via 14-day reverse repo auction

The Reserve Bank of India (RBI) on Friday said that it has drained 2 trillion of liquidity from the system via the 14-day reverse repo auction as it begins the process of normalizing liquidity operations.

The cutoff for the auction was set at 3.55%, 20 basis points (bps) higher than RBI’s reverse repo rate of 3.35%. RBI got bids worth 3.06 trillion.

RBI also announced liquidity infusion through the purchase of government securities worth 10,000 crore via open market operations. This is a shift from the earlier policy where the central bank used to conduct simultaneous purchase and sale of government securities through operation twist.

Bond traders and market participants said RBI is looking to increase short-term rates and keep long-term rates in check through these moves.

“RBI wants a calibrated exit from the ultra loose policy and at the same time doesn’t want to disrupt market sentiment. Therefore, it announced OMO purchase to alleviate any concern. OMO is acting like a minimum support price in the bond market," said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. Ltd.

Last week, RBI had said it will resume normal liquidity operations in view of the evolving financial conditions, and it intends to drain out excess liquidity and bring overnight lending rates closer to the reverse repo rate. As a first step, the central bank will conduct a 14-day variable rate reverse repo auction to encourage banks to park surplus funds with RBI. Since the announcement, the short-term rate in the money market has inched up by 25-30 bps.

RBI has allowed system liquidity to be in surplus since the lockdown in March. The daily liquidity surplus has been 6-7 trillion over the last few months. This has led to a drop in short-term rates to below the reverse repo rate of 3.35%. At the latest auction, the 90-day T-bill was sold at 3.038%, far below the reverse repo rate. The short-term borrowing cost for both corporates and banks have fallen to below 3.35%. The 10-year bond yield on Friday closed at 5.95, up 6 bps from its previous close.

The market expects the rollover of the 14 day reverse repo operations to continue. “If overnight rates and up to three -month T-bill rates continue to remain below the reverse repo rate, RBI may introduce longer tenor variable repo auctions. Thus, short term rates may inch up going towards March," said Bekxy Kuriakose, head- fixed income, Principal Asset Management Pvt. Ltd.

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