Once bitten, twice shy: Indian banks wary of parking funds with RBI after rate jolt

By Dharamraj Dhutia MUMBAI, July 24 - Indian banks are likely to adopt a cautious approach in deploying funds at the central bank's reverse repo auction which is likely to take place on

Mumbai: Indian banks are likely to adopt a cautious approach in deploying funds at the central bank's reverse repo auction which is likely to take place on Friday after a recent cash crunch forced them to borrow overnight at elevated rates, bankers said.

Lenders parked Rs 2 lakh crores ($23.17 billion) with the Reserve Bank of India at its seven-day variable rate reverse repo (VRRR) auction last Friday, even as large outflows for goods and services tax payments loomed earlier this week.

Banks had assumed they could access cheaper funding from the collateralised market when needed, a senior treasury official at a private bank said, requesting anonymity as he is not authorised to speak to the media.

"After cash shortages in the overnight market, there will be a re-look at how much money needs to be parked in the seven-day VRRR and subscription may be muted," said Alok Singh, group head of treasury at CSB Bank.

The weighted average call money rate (WACR) and the collateralised weighted average tri-party repo rate (WATR) surged around 40 basis points this week to 5.73 per cent and 5.72 per cent, respectively, on Wednesday.

The WACR, which serves as the operating rate, is typically aligned with the RBI's policy repo rate, currently at 5.50 per cent.

The central bank began conducting seven-day variable rate reverse repo (VRRR) auctions since June 27 and has occasionally held shorter-tenure VRRRs to help fine-tune overnight rates.

While the RBI did inject liquidity through short-term repos, bankers said the move came too late, as most borrowing had already occurred at higher rates.

"It is best the RBI provides some funding at the fixed repo window on overnight basis," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

"They can cap that amount, that will limit the need for fine tuning interventions. Also they may explore relying more on overnight VRRR operations, just like they have been willing to use overnight VRR auctions," he added.

($1 = 86.3260 Indian rupees)