The Reserve Bank of India (RBI) is introducing 14-day repo from Monday under its liquidity adjustment facility (LAF) from November 5.
The auctions will be conducted in addition to the daily repo and reverse-repo auctions. The 14-day auction will, however, be only for repo and not for reverse repo.
In its mid-term review of monetary and credit policy on October 22, the apex bank has said that it would introduce the long-term repo and reverse-repo auctions as and when required.
Money market dealers feel that the newly introduced facility will give the apex bank the power to control the short-term interest rates more effectively.
Said the treasury head of a private sector bank, "As there is no 14-day treasury bill now, there is no signalling of interest rates for very-short periods except the one-day repo and reverse repo. But now the central bank can effectively use the 14-day repo for controlling the short-term interest rates. It has already done the same with the daily repo and reverse repo auction over the last one-and-a-half years."
Dealers, however, are of the view that the LAF mechanism will be most efficient when the call money market can be turned into a purely inter-bank market.
A dealer said, "Even today the RBI tries to control the short-term interest rates by changing the lending (reverse repo) and borrowing (repo) rates through the LAF. However, as the banks still have access to the non-banks funds, the full control on the short-term interest rates is not in the RBI's hand. Once the non-banks will be out of the call market, the central bank, with the help of repo and reverse-repo auctions, will be able to control the market better."
