The cut-off yield for the 7-day term repos was 8.80 per cent, 20 basis points below the marginal standing facility (MSF) rate. The range of bids was 7.60 to 8.96 per cent. While the Reserve Bank of India (RBI) had indicated that banks could not bid for term repos at or below the repo rate there was no bar vis-à-vis the MSF rate. Looking at the trends in the call money rates, the substantial bid-cover ratios in the Treasury Bill auctions, the revival of commercial paper and certificate of deposit markets and the forthcoming maturity of the Cash Management Bill of about Rs 50,000 crore, it was expected that the banks would bid for yields at or less than the MSF rate. Otherwise, they may as well prefer the MSF even though it will not have the benefit of additional liquidity of a small order. The repos and the MSF have been rolled over daily, making them effectively term borrowing for even more than 14 days. The acceptance of yields below the MSF rate is an extension of the already-prevailing inverted yield curve.
Arbitrage opportunities for investment in Treasury bills and gilts with higher yields have arisen for banks with surplus statutory liquidity ratio investments. For increasing liquidity, the RBI should raise the ceiling on the amount of repos and/or MSF by 25 basis points of net demand and time liabilities. It will have a greater effect on liquidity than term repos that should be revisited for its effectiveness. The cash reserve ratio maintenance requirement should also be withdrawn as it does not "bite", according to the RBI.
A Seshan, Mumbai
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