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Banks parked Rs 2 trillion excess cash amid RBI signalling

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MUMBAI: The Reserve Bank of India (RBI) Friday signalled its intent to haul slumping overnight rates closer to the relevant benchmark when it accepted Rs. 2 lakh crore in reverse repo bids at 11 basis points higher than the reference gauge.

The cut-off yield, above which banks cannot claim a rate for parking excess cash, was at 3.55 percent. That was higher than the average market expectations, dealers said.

The acceptance of bids well above the policy rate shows that it would step in to absorb excess liquidity whenever the market rates fall too low. RBI Friday conducted a 14-day variable reverse repo auction to suck out excess cash from the banking system that has a surplus of Rs 5.6 lakh crore.

“The auction results indicate gradual removal of surplus liquidity and hardening of short-term rates,” said Ashutosh Khajuria, executive director at Federal Bank. “There could be new issuances of reverse repo auctions going forward.”

“Even cash reserve ratio may also be restored back to 4 percent at the end of the financial year,” he said.

About a year ago, the Monetary Policy Committee slashed the cash reserve ratio or the portion of deposits banks keep with the RBI by 100 basis points to 3 percent.

If CRR is restored to its erstwhile level, it is estimated to absorb Rs 1.5 lakh crore of cash.

Treasury Bills, short term sovereign instruments with up to one-year maturities, have yielded more than 25 basis points higher since the announcement of variable reverse repo auction.

“The RBI step is simply a restoration of a previously announced framework but has nevertheless caused some market anxiety with participants interpreting this as a first move towards policy reversal,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

“Ironically, owing to an inherent weak risk appetite of markets, the impact has travelled across the yield curve and not been limited to money market rates,” he said.

Select corporate bonds with up to five-year maturities or any exit option have yielded 25-45 basis points higher than the existing secondary market rates.

In the Friday’s variable auction, RBI received bids worth over Rs 3 lakh crore against which it retained about Rs 2 lakh crore.

If the central bank continues to intervene in the currency market checking the rupee’s rise via dollar purchases, the requirement for excess cash sterilisation goes up. More dollar purchases pump rupees into the banking system.

The RBI will aim to buy Rs 10,000 crore worth of government bonds from existing investors next Thursday through an open market operation. Those bonds have residual maturities between 2024 and 2030.

“The OMO announcement immediately after the reverse repo auction suggested that RBI was trying to balance it out,” said Soumyajit Niyogi, associate director at India Ratings. “While the central bank is rationalising short term rates in sync with benchmark rates, it is also keeping long term yields under check via OMO purchases.”

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