RBI cuts reverse repo’s relevance by new route - Times of India

RBI cuts reverse repo’s relevance by new route – Times of India

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MUMBAI: In a quiet move, the Reserve Bank of India (RBI) has managed to reduce the relevance of the reverse repo rate. Reverse repo is the rate at which the RBI borrows from banks and sets the floor for money markets.
This will force banks to find other ways to deploy funds, including the variable rate reverse repo auction which is for a longer duration but offers higher returns. According to bond dealers, this results in raising the floor rates as the variable rate reverse repo has returned banks 3.87% on an average as against 3.5% under the reverse repo.
The central bank has managed to achieve this by merely changing the timing of its fixed-rate reverse repo from market hours to post-market hours.
In his credit policy statement, RBI governor Shaktikanta Das announced that with effect from March 1, 2022, the fixed-rate reverse repo will be available only from 5.30pm till 11.59pm. In March 2020, to help banks deal with the pandemic, the reverse repos were conducted during 9am-11.59pm. The governor also advised banks to shift balances out of the fixed-rate reverse repo into variable rate reverse repo auctions and avail the automated sweep-in and sweep-out facility.
Ever since the pandemic broke, the floor for money market rates was set by the fixed-rate reverse repo — a window through which banks could lend to the RBI if they had no avenue to deploy their funds. It was widely expected that the RBI would hike the reverse repo rate as part of the normalisation of liquidity in the market. “Rates, whether it is the repo or the reverse repo, are reflective of the stance that the RBI has adopted. When the stance continues, we did not want to make any changes or tamper with things” said Das. Pointing out that the weighted average reverse repo rate is 3.87%, he said, “We have achieved this is in a non-disruptive and seamless manner.”
Last week’s monetary policy review surprised markets with a dovish outlook on inflation. According to bond dealers, with such a dovish forecast, the RBI need not revise interest rates.



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