RBI resumes repo ops after 5 months as LTRO maturities lined up

The Reserve Bank of India (RBI) on Thursday said it would conduct a 14-day variable rate repo auction worth Rs 50,000 crore on February 10. This will be the first repo auction by the central bank since September 22, 2022.

The reversal of the repo auction will take place on February 24, the RBI said in a press release.

When the central bank conducts repo operations such as 14-day repo auctions, it infuses short-term liquidity into the banking system.

Liquidity in the banking system is seen tightening in coming days due to the scheduled redemptions of large-scale long-term repo operations (LTRO) and targeted long-term repo operations (TLTRO). The RBI had conducted these repo operations in early 2020 in order to provide easy access to liquidity at the height of the Covid crisis in India.

According to RBI data, LTROs worth Rs 499 crore are set to mature on February 16. The maturities in the next two months are much larger, with LTROs and TLTROs worth Rs 13,018 crore set to be redeemed in March and that worth Rs 61,131 crore set to mature in April. The total amount of LTROs and TLTROs that will mature by the end of April stand at Rs 74,648 crore.

The outflows in March coincide with the end of the financial year, which is typically a busy time for banks on the asset-liability management front.

“I expect VRR will be the key instrument in the coming days to address the liquidity gap, and the RBI can come out with longer-duration VRR. However, if demand for credit remains high, and pressure on BoP (balance of payments) continues, the credit market will face challenges,” Soumyajit Niyogi, director, India Ratings & Research said.

Addressing the media after the monetary policy statement on Wednesday, RBI Governor Shaktikanta Das had said while higher government expenditure and the anticipated return of foreign exchange inflows would likely augment systemic liquidity, it would get modulated by the scheduled redemption of LTRO and TLTRO funds.

The central bank will conduct operations on either side of the Liquidity Adjustment Facility, depending on the evolving liquidity conditions, Das had said.

“From March to April, we have the bulk of the LTRO/TLTRO maturities; the big numbers are coming in April. The governor mentioned yesterday that they were staying alert to the situation and today’s (Thursday’s) announcement is basically in keeping with the large-scale maturities lined up,” Madan Sabnavis, Chief Economist, Bank of Baroda said.

According to the latest RBI data, the central bank infused funds worth Rs 11,172 crore into the banking system on February 8. An infusion of funds by the RBI implies tight liquidity in the banking system while an absorption of funds by the central bank indicates surplus liquidity with banks.

The injection of funds on February 8 marked the first time this month that liquidity slipped into a deficit. Between February 1 and 7, the RBI had absorbed funds worth a daily average of Rs 44,117.87 crore from the banking system.

In December-January, the RBI’s daily average absorption of funds was at Rs 1.6 trillion, Das said on Wednesday.

While liquidity in the banking system remains at a surplus, the excess funds have come down sharply from around Rs 8 trillion in early April 2022.