A market repo transaction is used to raise short-term funds with securities such as government bonds considered as collateral.
Between April and November 2023, the daily average value of market repos was ₹1.46 lakh crore, the highest on record, and 15% higher than the average for 2022-23, according to the latest data published by the Clearing Corporation of India (CCIL).
On Thursday, repo volumes on the CCIL’s trading platform closed at ₹1.51 lakh crore, with the weighted average rate at 6.79%. Money markets were shut on Friday for Republic Day.
The wide gap between the effective funding cost of 6.79% and the Reserve Bank of India’s repo rate of 6.50% reflects the degree to which the liquidity deficit in the banking system has pushed up the short-term cost of funds. In theory, banks’ overnight funding costs – represented by the weighted average call rate – are supposed to be closely aligned with the repo rate.
As of January 24, the liquidity deficit – measured by the amount banks borrowed from the RBI – was a massive ₹3.5 lakh crore, the latest central bank data showed.
The liquidity deficit is broadly owing to bank credit growth outstripping deposit growth and a slow pace of government spending. Over the past couple of years, the RBI’s actions in the foreign exchange markets as well as periodic liquidity-draining measures have also contributed to shrinking cash in the banking system. The central bank is committed to a stance of withdrawal of accommodation as it battles inflation.Since mid-December, however, the RBI has been carrying out regular seven-day variable rate repo operations as well as some shorter-tenure repo operations to inject funds and ease the stress on liquidity.
“In the past, banks had access to borrowing from the RBI’s LAF (liquidity adjustment facility) on a daily basis as long as they had adequate securities. Now it depends on the RBI coming out with LAF operations which is at the discretion of the central bank – apart from that you have the marginal standing facility borrowing window,” said Soumyajit Niyogi, director at India Ratings & Research.
In February 2020, the RBI announced the withdrawal of daily fixed-rate repo operations and said that a 14-day term repo or reverse repo operation would be the main liquidity management tool for handling frictional – or transient – liquidity requirements.
“That’s why banks, mutual funds and other corporates are transacting between themselves. It is happening between the banks that have deficit liquidity and those that have surplus liquidity,” Niyogi said.
With banks raising funds at a rate which is higher than the repo rate, the higher cost of funds has been passed onto other short-term debt instruments such as commercial papers and certificates of deposits.
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