RBI sparks confusion despite $4.1 billion in cash injections

RBI has also announced a 7-day term repo auction

Mumbai: The Reserve Bank of India's (RBI) announcement of around 250 billion rupees ($4.09 billion) worth of injections via term repos were intended to ease concerns about a cash crunch, but instead added to uncertainty and volatility in the money markets, traders said. The RBI announced two separate overnight variable rate repos on Monday, worth about 50 billion rupees each, and followed up on Tuesday by announcing a 7-day term repo auction that could inject up to 150 billion rupees.

Although the overnight cash rate closed at 8.00/8.05 percent, in line with the repo rate, it fluctuated in a wide 8.00 percent to 8.80 percent range through the session. Traders said such rapid-fire announcements of these term repos, or cash-for-loans transactions, far from easing market sentiment, created confusion about the central bank's rationale.

"Why do overnight repos when they could have simply announced a larger amount for a slightly longer term?" asked a senior trader, questioning the need for two separate overnight repos preceding the auction of a 7-day term repo. The announcements come after RBI Governor Raghuram Rajan said last week the central bank would consider issuing more frequent and shorter-dated repos, or cash-for-loans transactions to smoothen volatility in money markets.

The RBI began 7- and 14-day term repos in October, but traders complained they were announced too sporadically, making it hard for banks to manage their near-term cash needs.

Still, some analysts noted that despite the confusion on Tuesday, the injection of funds by the RBI would prove a positive for markets.

"I believe the market is unnecessarily worrying when enough liquidity is there in the system through term repo and overnight repos," said N.S. Venkatesh, treasurer at IDBI Bank in Mumbai said.

( Source : reuters )
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