2024-11-05 17:48:00
The bulk of the volume in the overnight segment is in the Treps segment, where the rate has been about 12 basis points lower than repo.
Liquidity management is a key aspect of monetary policy, said Gaura Sen Gupta, chief economist at IDFC First Bank. “So, in any stance, their aim will be to make sure the WACR stays as close as possible to the repo rate. The WACR is somewhat aligned to the repo but, more importantly, the Treps rate has been below the repo rate since July.”
The Treps rate was 6.34% in October and 6.42% in September, show RBI data. The Treps segment permits participation by a broader set of market participants such as mutual funds and insurance companies in addition to banks. While the RBI regulates banks, others like insurers do not fall under the RBI’s jurisdiction.
The WACR for October was 6.35%, as the RBI conducted 14 variable rate reverse repo (VRRR) auctions to absorb excess liquidity. Banking system liquidity on an average was a surplus of ₹1.47 lakh crore, data showed. The WACR was 6.52% in September when the RBI conducted eight VRRR auctions and four variable rate repo (VRR) auctions as liquidity went into a brief deficit mode that month. The average surplus in September was ₹1.05 lakh crore.
“Currently, the RBI is very cautious about disrupting market volatility. They (RBI) want to ensure that market volatility is smoothened out. And hence you see they have been active on both sides in using finetuning operations to manage liquidity,” said an economist at a public sector bank.
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**Interview on Tri-Party Repo Rates and Liquidity Management**
**Date:** November 5, 2024
**Interviewer:** Anisha Verma
**Alex Reed:** Gaura Sen Gupta, Chief Economist at IDFC First Bank
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**Anisha Verma:** Welcome, Gaura! Thank you for joining us today. The Indian banking system is under scrutiny as we see the weighted average call rate (WACR) struggling to align with the repo rate. Can you explain why this is happening?
**Gaura Sen Gupta:** Thank you, Anisha. Yes, the current situation is quite interesting. The Reserve Bank of India (RBI) has been conducting both variable rate repo and reverse repo auctions to manage liquidity. However, we’ve observed that the tri-party repo (Treps) rates have consistently been below the repo rate for the past several months. This indicates that the liquidity dynamics in the overnight market are somewhat misaligned.
**Anisha Verma:** That’s concerning. What are some reasons for Treps rates being lower than the repo rate?
**Gaura Sen Gupta:** There are a few factors at play. Firstly, the Treps segment allows a variety of participants, including mutual funds and insurance companies, which can affect the pricing dynamics. Additionally, market conditions and investor sentiment can lead to an excess of liquidity in this segment, driving down rates. For instance, the Treps rate was recorded at 6.34% in October and 6.42% in September, which is significantly lower than the 6.50% repo rate set by the RBI.
**Anisha Verma:** What impact does this have on the overall liquidity management strategy of the RBI?
**Gaura Sen Gupta:** This is crucial for monetary policy. The RBI’s objective is to keep the WACR as close to the repo rate as possible, which serves as a benchmark for pricing loans. If the Treps rates remain lower, it complicates their efforts to absorb liquidity effectively. In October, the WACR stood at 6.35%, which reflects ongoing challenges.
**Anisha Verma:** With banking system liquidity at an average surplus of ₹1.47 lakh crore, how does this surplus influence these rates?
**Gaura Sen Gupta:** The surplus liquidity indeed plays a significant role. When liquidity is abundant, it tends to lower rates in the market, particularly in segments like Treps. The RBI has been actively conducting variable rate reverse repo auctions to manage this surplus and align rates more closely with its repo rate. However, the challenge remains in effectively managing the broader market participants who are not under RBI’s direct regulation.
**Anisha Verma:** what do you foresee for the upcoming months regarding liquidity management and Treps rates?
**Gaura Sen Gupta:** It will be crucial for the RBI to monitor these trends closely. We might see continued volatility in the short term, especially as economic conditions fluctuate. The RBI will likely need to adjust its approach, potentially increasing interventions to stabilize the Treps rates while ensuring that overall liquidity remains conducive for economic growth.
**Anisha Verma:** Thank you, Gaura, for your insights. It seems like we have an interesting period ahead for India’s monetary policy!
**Gaura Sen Gupta:** Thank you for having me, Anisha. It’s always a pleasure to discuss these vital topics.
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This concludes the interview.
