Reverse repo normalization
- State Bank of India’s economic research team believes the stage is set for a reverse repo normalisation, given that the Triparty Repo Dealing and Settlement (TREPS) and call money rates are ruling higher than the reverse repo rate.
- Normalization means the reverse repo rate (the interest rate banks earn for parking surplus liquidity with RBI) of 3.35 per cent can be raised to 3.75 per cent in one or two stages.
- The RBI’s revised liquidity management framework (February 2020) has retained the width of the liquidity management corridor at 50 basis points – the reverse repo rate being 25 basis points below the repo rate (of 4 per cent) and the Marginal Standing Facility rate 25 basis points above the repo rate.
- The width of this corridor was increased to 90 basis points in the April-May 2020 Covid period by cutting the reverse repo rate.
- The purpose of the aforementioned cut in reverse repo rate was to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and use these funds for on-lending to productive sectors of the economy.
- A reverse repo is a rate at which RBI takes money from banks.
- As of now, RBI pays 3.35 percent in the fixed-rate repo window, but it takes only a maximum of Rs 2 lakh crore in that window.
- The balance excess liquidity can be lent by banks to RBI at its variable rate reverse repo (VRRR) auctions.
- These may be 7-day, 14-day or 28-day reverse repo auctions.
- Banks have been getting 3.8-3.99 percent at these auctions.
Source: THE HINDU.