Repo Operations: Long-Term Repo Operations Help Ease Call Fees: Report
He said massive amounts of government borrowing to shore up cash reserves could help. The investment bank said that if the central bank begins to ease its policy interest rate, the call rate could get closer to the base rate.
The recent tightening of liquidity among Indian banks, primarily due to rising government cash balances with the RBI, has resulted in interbank call money rates consistently remaining higher than the policy repurchase rate.
The central bank has injected liquidity averaging ₹1.6 billion (almost 1% of net bank debt) over the past two months. Even though the call rate has been eased, it is not enough to continue trading at the policy rate.
Goldman Sachs said that as large government cash balances have caused the WACR to exceed the repo rate in recent years, policymakers may need to explore alternatives to respond to frictional liquidity shocks that last longer than expected.
Among other things, this may include long-term repo operations of 14 days or more as government cash balances build up and government borrowing is staggered to facilitate cash holdings. As the RBI, and the government, begins withdrawing cash balances from the RBI, we expect that when the RBI eventually begins its easing cycle, the RBI will have a liquidity surplus and call rates will trade below repo. We expect cuts of 25 basis points each. September and December 2024.
