India cenbank seeks market views on aligning call money rate with repo, sources say
The move follows a Reuters report last week that said the RBI wants the overnight call rate to broadly align with the policy repo rate and is considering steps to ensure that happens.
The policy rate currently stands at 5.50%, while the overnight call rate averages 5.30% and the TREPS rate hovers near 5.20%. The overnight call rate and TREPS rate have averaged below the policy rate since April.
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.
The RBI spoke with large treasury officials on Friday to review liquidity conditions and understand why the overnight call rate — the operative policy target — has been persistently trailing the repo rate, two of the sources said.
None of the sources wanted to be named because they are not authorised to speak to the media. The RBI did not immediately reply to a Reuters email seeking comment.
The central bank is also keen to understand why treasury bill yields have spiked in the last week, the two sources added. The yield on 364-day notes was sharply higher than estimates last Wednesday.
"The motive seemed to be to sensitise the market that a variable rate reverse repo auction would be in the offing," a senior official at a state-run bank said.
The source had added that the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required.
The weighted average overnight call rate has remained well below the RBI's key repo rate and closer to the policy corridor's floor, the Standing Deposit Facility rate, for the past few weeks.
On June 6, the RBI slashed its key policy rate by 50 basis points, but changed its stance to neutral, indicating limited room for further cuts. The RBI also announced a reduction in banks' cash reserve ratio by 100 basis points September onwards.
The central bank also stopped conducting daily fund infusion through variable rate repo since June 11, which market took as an indication that the RBI may move towards VRRR soon.
Market participants have requested that the RBI avoid shocks in liquidity management which would help avoid volatility in short-term rates, another treasury official said.
"Given that the focus of monetary policy is on enhancing transmission, the expectation channel is equally important. Hence, it would be better to move overnight rates towards repo rate after some time, allowing transmission to gain pace," said Gaura Sen Gupta, chief economist with IDFC First Bank.
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