Market participants ask for removal of borrowing limit of 0.5% from repo tender

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SummaryMoney market participants have asked the Reserve Bank of India to remove the limit on banks’ borrowing from the repo tender without

Money market participants have asked the Reserve Bank of India to remove the limit on banks’ borrowing from the repo tender without which the operative rate is unlikely to come down to the repo rate of 7.75%.

Representatives from primary dealers, foreign exchange dealers and fixed income market met with the central bank officials ahead of Januuary 28 monetary policy.

Besides removal of the cap, dealers requested the RBI to soften its monetary policy stance given the economic growth scenario and an easing inflation.

“What is now required is that policy rates are eased, not immediately but sooner as inflation is starting to come down but growth continues to be tepid,” said a senior bond dealer.

In July 2013, as part of measures to curb the volatility in the exchange rate, the RBI had capped banks’ borrowings from the repo tender at 0.5% of deposits. It had also hiked the marginal standing facility rate to 10.25% and imposed restrictions on banks’ positions in the forex market.

The corridor between the repo rate and the MSF rate has been restored to 100 bps and some of the limits on forex derivatives have been eased. However, the limit on banks’ borrowings from the repo tender still remains and dealers said that the RBI intends to keep the cap for a prolonged period.

“The cap is the reason why the term money curve will develop. It is going to remain,” said a senior bond dealer.

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