 "Banks ask RBI to shorten repo-MSF corridor")
The volatility in overnight rates over recent months is prompting market participants to request the Reserve Bank of India (RBI) for narrowing the gap between the repo rate and the Marginal Standing Facility (MSF) one.
Repo is the rate at which banks may borrow from RBI for short-term needs. MSF is meant for overnight borrowing, on all working days. The gap, currently 100 basis points (bps), was fixed by the central bank following the Mohanty committee recommendations in 2011. However, during the currency crisis of 2013, RBI decided to broaden the gap, to arrest volatility in the foreign exchange market.
Dealers said the volatility in overnight rates had been 50-100 bps. This volatility was also due to introduction, in October, of seven-day and 15-day term repo auctions, experts said. “The introduction of term repo auctions resulted in the volatility in short-term rates. On days of term repo, the rates are lower but the next day, the rates are again high. If the corridor between the repo and MSF rates is reduced slightly, the volatility will be reduced. We might also ask RBI to remove the cap on repo borrowing,” said a treasury official, who did not wish to be named.
In mid-July, RBI had raised the MSF rate to 10.25 per cent from 8.25 per cent earlier, to arrest volatility in the rupee’s value against the dollar. After Raghuram Rajan took over as governor (at the beginning of September), the rate was cut in three tranches; it is currently 8.75 per cent, while the repo is 7.75 per cent.
Banks are also planning to ask the central bank to lift the cap on borrowing under the daily Liquidity Adjustment Facility (LAF). Currently, banks can borrow 0.5 per cent of net demand and time liabilities (NDTL) from the LAF window. In mid-July, the cap was set at one per cent of banks’ NDTL.
“The liquidity situation in the market should be such that there is no need to access the MSF window. Only then can short-term rates be lower than MSF and higher than repo. Besides, the corridor between repo and MSF rates, at 100 bps, is too high. If market rates move between the MSF and repo rates, in addition to the tightening RBI has done, that becomes too large a movement,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.
The Clearing Corporation of India said the call money and Collateralised Borrowing and Lending Obligation rates hovered on Monday between 8.25 per cent and nine per cent.
Repo is the rate at which banks may borrow from RBI for short-term needs. MSF is meant for overnight borrowing, on all working days. The gap, currently 100 basis points (bps), was fixed by the central bank following the Mohanty committee recommendations in 2011. However, during the currency crisis of 2013, RBI decided to broaden the gap, to arrest volatility in the foreign exchange market.
Dealers said the volatility in overnight rates had been 50-100 bps. This volatility was also due to introduction, in October, of seven-day and 15-day term repo auctions, experts said. “The introduction of term repo auctions resulted in the volatility in short-term rates. On days of term repo, the rates are lower but the next day, the rates are again high. If the corridor between the repo and MSF rates is reduced slightly, the volatility will be reduced. We might also ask RBI to remove the cap on repo borrowing,” said a treasury official, who did not wish to be named.
In mid-July, RBI had raised the MSF rate to 10.25 per cent from 8.25 per cent earlier, to arrest volatility in the rupee’s value against the dollar. After Raghuram Rajan took over as governor (at the beginning of September), the rate was cut in three tranches; it is currently 8.75 per cent, while the repo is 7.75 per cent.
Banks are also planning to ask the central bank to lift the cap on borrowing under the daily Liquidity Adjustment Facility (LAF). Currently, banks can borrow 0.5 per cent of net demand and time liabilities (NDTL) from the LAF window. In mid-July, the cap was set at one per cent of banks’ NDTL.
“The liquidity situation in the market should be such that there is no need to access the MSF window. Only then can short-term rates be lower than MSF and higher than repo. Besides, the corridor between repo and MSF rates, at 100 bps, is too high. If market rates move between the MSF and repo rates, in addition to the tightening RBI has done, that becomes too large a movement,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.
The Clearing Corporation of India said the call money and Collateralised Borrowing and Lending Obligation rates hovered on Monday between 8.25 per cent and nine per cent.