Mumbai, Aug. 13: The Reserve Bank of India (RBI) today introduced an overnight repo auction at 4.5 per cent under the liquidity adjustment facility (LAF).
The central bank sucks out liquidity from the system through a repo auction. The RBI has been conducting seven-day and 14-day repo auctions, which would continue, it added.
The RBI, while introducing the revised LAF scheme effective March 29, indicated that it would continue to have the discretion to conduct overnight or longer-term repo auctions at fixed or variable rates depending on market conditions and other relevant factors.
“Assessing the current situation, it has been decided, until further notice, to introduce overnight fixed-rate repo at 4.50 per cent with effect from August 16, in addition to the existing overnight fixed reverse repo at 6 per cent. The current practice of seven-day and 14-day repo will also continue,” an RBI statement said.
Treasury analysts reacted positively to the RBI announcement, stressing that the move facilitated liquidity instead of sucking it from the system. In the course of normal seven-day or 14-day auctions, the money subscribed is blocked for these days, it added.
However, in the interim, if there is a pickup in credit or an outflow, banks had to take recourse to the call money market, leading to hardening of rates there.
“It is not a liquidity tightening move, but one that facilitates liquidity,” IDBI Bank forex and treasury head U. Venkatraman said. The measure will enable banks to plan their liquidity well, he added. “With the current high inflation and record crude prices, the RBI is focusing on the financial market, which is a good sign,” he added.
Centurion Bank country treasurer Tarini Vaidya also reacted positively to the RBI move, saying it would only add liquidity in the system.
For the bond markets, the RBI announcement came after the government revealed inflation numbers that were in line with expectations. The rate of inflation rose marginally to 7.61 per cent for the week-ended July 3.
Both these factors caused bond prices to rally by Re 1 over its previous close. Market analysts said government security prices gained by over 50 paise after the RBI announcement. Yields on the benchmark 10-year security finished lower at 6.53 per cent after it had hit an intra-day high of 6.68 per cent on inflation numbers.
Analysts feel that the worst is over for inflation and it is likely to gain by another 20-30 basis points if the recent hike in oil prices has to be taken into account. “I see yields on the benchmark security trading in a range of 6.30-6.65 per cent,” Venkatraman added.
