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RBI VRRR: Did RBI tighten monetary policy during the three-day VRRR while no one was watching?

New Delhi – Reserve Bank of India On Monday, it may have given the strongest indicator of the intent to undertake the imminent formal normalization of special policy adaptations made to protect the economy from the Covid-19 crisis.

While strengthening domestic inflation and reversing the ultra-loose policies of developed countries, RBI Earlier this month, India’s central bank kept interest rates unchanged and reiterated the need for policy support to ensure sustainable economic growth, to show a shift away from accommodation.

Behind the scenes, however, the RBI is moving its money market rate towards a benchmark policy repo rate rather than a reverse repo rate, which was aggressively determining the bank’s overnight funding costs in the bank’s record surplus liquidity. We are actively taking measures to make fine adjustments. system.

Through a seemingly harmless press release on Monday, the central bank has made clear steps towards firmly reestablishing its reporate advantage as a benchmark overnight funding cost. And it did so without actually increasing the reverse repo rate and thus creating an immediate headline.

According to the RBI’s announcement, the central bank will hold a three-day floating rate reverse repo auction worth 2 rupees from 1:30 pm to 2:00 pm Wednesday.

The RBI began in January 2021 by draining liquidity through a floating rate reverse repo auction, but this is the first time a central bank has been operating for three days instead of a seven or 14 day auction. ..

What did RBI do?

RBI essentially promotes ultra-short term by providing banks with the opportunity to receive 3.99% (the highest permissible cutoff rate for reverse repo windows with a typical interest rate structure) to park their funds for 3 days. Rate within the shade of a general repo rate of 4.00 percent.

The central bank may have been bound by the fact that the banks were not in favor of parking large amounts of surplus cash for extended periods of time, resulting in a significant shortage of applications for the recent 14-day VRRR auction. ..

The RBI said in its latest monetary policy statement that it plans to make the auction route a primary tool for liquidity absorption by January.

In fact, this was another hint to a tighter rate. The fixed rate reverse repo window offers 3.35% (current reverse repo rate), but at auction, banks can charge as much as 3.99% from RBI.

For a long time, banks parked their funds at the rates offered in collateralized three-way repo and at RBI, and now by central banks offering a theoretically much higher duration reverse repo window. We have taken advantage of the opportunity to arbitrate with the rates offered to. According to Treasury officials, it’s not surprising that the weighted average call rate also drifts towards the repo rate.

The weighted average call rate is the monetary policy anchor expressed by the RBI.

“Money market rates will steadily move to at least 3.75-3.80% and soon to repo rates,” said the trading head of the primary dealer. “Currently, the reverse repo rate hike in February is a completed deal and it doesn’t make much of a difference. I just wonder why it didn’t happen this month.”

As a sign of market expectations for short-term policy normalization, the 10-year benchmark 6.10 percent 2031 paper yields rose 4 basis points to the psychologically significant 6.45 percent mark. Bond prices go down as yields go up, and vice versa.

The Fed’s recent decision to suggest higher interest rates and the Bank of England’s surprising rate hike may have put the RBI into action. The $ 1 million question that comes to mind for sovereign debt traders is whether the February repo rate will rise following the stealth hike. This has increased the reverse repo rate for all practical purposes.

RBI VRRR: Did RBI tighten monetary policy during the three-day VRRR while no one was watching? RBI VRRR: Did RBI tighten monetary policy during the three-day VRRR while no one was watching?

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