RBI is conducting a 4 days Term Reverse Repo auction for Rs 150 billion plus a greenshoe option of Rs 100 billion on the 2nd of June 2014. Term Reverse Repo auction is the opposite of Term Repo auction, which the RBI has been conduction over the months to infuse liquidity into the system. RBI had restricted banks borrowing under LAF (Liquidity Adjustment Facility) to 0.25% of NDTL (Net Demand and Time Liabilities) in its April 2014 policy.
Term Reverse Repo auction is held by the RBI to take out excess liquidity from the system. Markets bid to lend funds to the RBI.
RBI had conducted a 14 days Term Repo auction for Rs 600 billion on the 30th of May where it accepted bids for the full amount at 8.01%. So why is it conducting a Term Reverse Repo auction on the next working day i.e. 2nd June to take away part the money lent under Term Repo auction?
Does the RBI believe that it lent too much money under Term Repo? Or is the RBI worried that the market will use the excess liquidity to drive down bond yields?
The market will not like the announcement of the Term Reverse Repo auction and will sell initially before settling down for longer term views post policy on the 3rd of June.