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Worried over volatility on intra-day call money days, the Reserve Bank of India (RBI) said it would offer funds to banks via the fixed rate repo and reverse repo windows on a real-time basis.
The central bank aims to keep overnight rates close to the repo rate, 7.25 per cent. The rate fell below seven per cent on a few occasions in the past fortnight.
“This will enable eligible participants to receive the credit or debit immediately on placement of the bids or offers, subject to availability of the collateral or funds, within the prescribed time window,” RBI added on Monday.
Banks are allowed to borrow up to 0.25 per cent of their net demand and time liabilities.
Volatility in the overnight rate became pronounced since early July, as liquidity turned into surplus on the back of higher government spending. RBI tried to suck out the surplus last week by selling government securities. Market participants said liquidity would continue to be in surplus for some months.
“With this, liquidity will not be under strain and people will be able to use that money,” said Ashutosh Khajuria, executive director, Federal Bank.
While the funds for the fixed rate repo will be available on a real-time basis, the variable repo proceeds will continue to be available with a lag.
While the move to reduce volatility in call rates have been welcomed by the market, dealers said they’d continue to prefer borrowing through the call money window, as it was cheaper.
“Now, people will get this liquidity without waiting. But, how many people these days borrow from LAF? The repo rate (there) is 7.25 per cent, while borrowing through the call money market turns out to be cheaper. So, people will continue to borrow from there. This facility cannot be extended for variable rate repos, as the borrowing amount is not fixed there,” said the head of treasury of a large state-run bank.
