Term repo of seven days and 14 days were introduced after RBI capped banks borrowing from the central bank at the normal repo rate and hiked MSF by 200 bps to 10.25%. Initially RBI allowed borrowings of 0.25% of net time and deposit liabilities (NDTL) from the facilities.
Keeping in view the need to infuse liquidity into the system to normalise liquidity conditions, term repo will now be conducted for a total notified amount equivalent to 0.5% of NDTL of the banking system, RBI said in the monetary policy statement.
Borrowings from the term repo window are over and above the 0.5% of deposits that each bank can borrow from the overnight repo window. Cumulatively, this gives banks access to about R80,000 crore of liquidity through the repo facilities compared with the previous R60,000 crore.
The provision of another 0.5% on term repo would mean that along with repo and standing liquidity facility, the overnight rate would cease to be at MSF, but move between repo and MSF (around 8.25%), said a senior fixed income strategist.
In the last auction, the cut off rate at the seven-day repo was around 8.79%, when the marginal standing facility (MSF) was at 9%. In the latest policy, governor Raghuram Rajan cut the MSF rate by 25 basis points and raised the repo rate by 25 bps to 7.75%, suggesting the cost of borrowing through term repo will drop by about 20 bps as the cut off rates of term repo is roughly 20 bps below MSF during the auction.
Since the move will create more liquidity under the repo (overnight and term) window, the MSF borrowing which currently stands at around R20,000-30,000 crore will go down to R10,000-20,000 crore. Hence, the move will also bring down short-term cost of funds for banks, said Ajay Manglunia, the head of fixed income at Edelweiss.
The yields on 10 year government bonds came off by close to 10 basis points to 8.569% on Tuesday as the market cheered RBIs move to release more liquidity in the market. In the days to come, this may result in lower pricing of commercial paper and certificate of deposits.
The pricing of CP and CD will be finer as it creates short term yield curve, said N.S Venkatesh, chief general manager and treasury in IDBI Bank. He also added to deepen the term money market may introduce more maturities under the term repo window.