RBI may reject large reverse repo bids

The Reserve Bank of India (RBI) may avoid moral suasion to deter bids at its daily reverse repo tenders and instead reject bids if the cash parked by banks with the central bank rises above its holding of government securities, dealers said.

Today, the central bank received and accepted Rs 79,005 crore bids at its reverse repo tender, registering a 22-month high. On June 6, 2006, banks parked Rs 72,300 crore at RBI's reverse repo tender.

Market speculation was that the central bank might not have enough stock of government securities if bids at the reverse repo increased sharply further. Some dealers speculated that RBI might call up banks to dissuade them from submitting bids at the reverse repo auctions.

However, some bankers said the central bank might simply reject some of the bids, if it runs short of government securities for the reverse repo tender. RBI borrows cash and lends securities in lieu at 6 per cent through its reverse repo tenders to ensure that overnight rates don't crash below this rate.

It simultaneously borrows securities and lends cash in lieu at 7.75 per cent through its repo tenders.

Banks are flush with liquidity following a surge in the government expenditure in the last few days.

RBI has lined up government bond and Treasury bill auctions to suck out liquidity. Between Friday and Monday, about Rs 22,500 crore will flow out of the banking system.

Until these outflows take place, the central bank's ability to absorb cash from banks "� to prevent overnight rates from falling below 6 per cent "� will be severely strained, dealers said.

Some bankers also said they expected the government spending to slow down.

"I think there was lumped-up spending by the government late in March and the first few days of this month," a banker said. "It should taper off now."