The Hindu Business Line : Reverse repo, repo spread widening

From August 30, banks willing to borrow short-term money (through repo) from the Reserve Bank of India will have to pay 9 per cent interest, whereas when they park their funds (reverse repo), they will merely get 6 per cent.

Aren’t the banks being to asked cough up more, in what many reckon as the steepest gap between the twin rates?

Here is what the RBI Governor Dr. Y. V. Reddy had to say on the widening spread: “In any market, there will always be a gap between bid and ask. But the spread today has widened, reflecting uncertainties. Bear in mind that public policy is bearing the burden of uncertainty.”

Bank officials indicate that banks are less inclined to use the reverse repo route because the rates offered are lower than those at the call money market (for short-term).

Just two years ago, a gap of 1 per cent raised many eyebrows, but very few seem to take notice of the gradual widening band between the key rates. Dr Reddy hiked repo rate by 50 basis points to 9.0 per cent this time while making no change in reverse repo rates (unchanged from July 2006).

Relevant rate

Clearly, repo rate is what the ‘Guv’ is focussed on as he chooses to maintain ‘tighter’ liquidity conditions.

Till date, he has cracked the repo whip 3 times in as many months. “We do not like (excess) volatility. We are more focused on repo rate as the relevant rate,” he said.

But to a query on whether his ‘tightening’ steps were hurting banks, Dr Reddy feels banks have complained too much.

“Financial companies are pretty resilient and banks’ profitability has not come down. That means their perceived outcomes were not consistent with their complaints,” he quipped.

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