India cenbank announces reverse repo to arrest fall in overnight rates
MUMBAI (Reuters) -India's central bank said on Tuesday it will conduct a seven-day variable rate reverse repo auction worth one trillion rupees ($11.62 billion) on June 27, following a review of liquidity conditions in the banking system.
The Reserve Bank of India (RBI) added that after reviewing evolving liquidity conditions, it will not conduct the 14-day main operation scheduled for Friday, for the ensuing fortnight, according to a press release.
India's banking system liquidity surplus stood at 2.44 trillion rupees as of June 23, as per RBI data.
The central bank in June announced a surprise 100-basis-point reduction in the cash reserve ratio, the portion of deposits banks must park with the RBI, in four equal tranches beginning September, lowering it to 3%, to boost policy transmission.
Amid surplus liquidity conditions, the weighted average overnight call rate has remained well below the RBI's key repo rate and near the policy corridor's floor, the Standing Deposit Facility rate, for the past few weeks.
A persistent gap between the RBI's operative rate and the policy rate typically signals that banks are accessing cheaper funding than what the central bank is comfortable with, as per traders.
Earlier this month, Reuters had reported that the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required.
"The move (VRRR announcement) indicates that the RBI wants the operative rate closer to the repo rate," said Gaura Sen Gupta, India economist at IDFC FIRST Bank.
The move comes sooner than expected with the transmission via various channels - credit, deposit and bond market - in its early stages, Sen Gupta said, adding that the move may lead to a further rise in short-term yields.
($1 = 86.0580 Indian rupees)
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