Fed reverse repo operation sees $460.731b taken by 62 counterparties.

Fed reverse repo operation sees $460.731b taken by 62 counterparties.

The Reserve Bank of India (RBI) has announced a Rs 1 lakh crore reverse repo auction scheduled for Friday, the first such operation in seven months. This move aims to stabilize short-term interest rates near the repo rate amid declining credit growth and easing money market conditions [1].

The auction, a variable rate reverse repo (VRRR), will run for seven days from 10:00 AM to 10:30 AM on Friday. In VRRR auctions, banks deposit their surplus funds with the RBI, with the interest rate determined through competitive bidding, typically close to or above the reverse repo rate [1].

The decision to conduct this auction comes at a time when the banking system has experienced a liquidity surplus, with June's average liquidity surplus averaging Rs 2.76 lakh crore. This surplus has been a result of the RBI's previous liquidity injections, which totaled Rs 9.5 lakh crore since January, and the recent decline in credit growth [1].

The inter-bank call rate averaged 5.17% in June, significantly lower than the RBI's standing deposit facility (SDF) rate of 5.25%. The RBI aims to stabilize short-term rates near the repo rate to prevent excessive borrowing from short-term markets, which can distort financial stability [1].

The auction is expected to push short-tenure papers' rates 5-10 basis points higher, according to market participants. This move is part of the RBI's broader strategy to manage liquidity and stabilize interest rates [1].

This auction follows the RBI's decision to reduce the cash reserve ratio (CRR) in four tranches, starting from September, which will inject Rs 2.5 lakh crore of durable liquidity into the system [1].

The RBI's recent actions highlight its efforts to manage liquidity and stabilize financial conditions in the face of declining credit growth and easing money market conditions. The auction is a significant step in the RBI's strategy to maintain financial stability and support economic growth.

References:
[1] https://www.financialexpress.com/policy/economy-rbi-to-conduct-rs-1l-crore-reverse-repo-on-friday-3891737/