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Repo is Back. Will Banks Hike FD rates?

The 3G Auctions and an advance tax date (Jun 15) have produced an interesting twist: Banks are scrambling around for money.

After nearly two years, the RBI Repo Window is showing action – Repo is where banks borrow money from RBI for a very short term, typically, and provide securities as collateral (which they will “repurchase”, thus “repo”). Reverse repo is the other direction – where banks park excess cash with the RBI.

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In the last two days banks have borrowed around 60,000 cr. each day, with nearly no reverse repo, meaning things are tight on the liquidity front. This is supposed to be temporary, which is why the RBI has temporarily opened a second liquidity window for the repo/reverse repo auctions, upto 0.5% of bank deposits. I’m guessing that adds up to about 35,000 cr. which has already been maxed out.

This liquidity adjustment only lasts till July 2. Some of the advance tax outgo may be reversed, but the 3G money will still be a pain point. The call money market will show signs of stress if the liquidity situation gets worse (typical yields are 3.5% to 5% in the Call Money markets, can shoot up if people are desperate for money).

How this is useful for some of us: Banks may offer higher rates for FDs, either very soon or after July 2.

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