Date:21/07/2005 URL: http://www.thehindubusinessline.com/2005/07/21/stories/2005072101950600.htm

Back Reverse repo auction amounts shoot up

Our Bureau

Mumbai , July 20

THE amounts in the Reserve Bank of India's reverse repo auction have increased from around Rs 3,000 crore last week to almost Rs 20,000 crore this week. While this is providing some comfort in terms of liquidity, it is not enough, said dealers.

On July 11, the reverse repo auctions amounted to Rs 3,360 crore and on July 20, the amount had increased to Rs 18,470 crore, according to the RBI Web site.

According to a primary dealer, this sudden increase seems to indicate that the Government was withholding the advance tax money and it has now been released in phases. That is why even after the auction of Government bonds, the system is now flush with funds.

The Government mopped up Rs 15,000 crore through two auctions — a Rs 10,000-crore auction on July 6 and a Rs 5,000-crore auction on July 18. As a compounded result, bond prices lost heavily, the dealer said. In the last three weeks, bond yields have risen by 35-40 basis points.

"Usually the money collected through taxes is released back into the system within a week. But this time it has come after two weeks," said the dealer.

One reason for this is probably because the Government wanted to keep inflation down. If oil prices had risen, inflation would have increased too. But now the pressure has reduced a bit.

Another reason for the money coming into the system is the Government has started spending on its various projects, which is inevitable, said another dealer.

About a likely hike in reverse repo rates in the upcoming quarterly review of the monetary policy, the dealer said the two indicators are liquidity, which, as of now, is comfortable; and inflation, which is coming down.

"Inflation rate of around 4.03 per cent is a good level in over a year. Liquidity has improved. Therefore, there is no pressure to increase interest rates," he said.

"If interest rates go up, credit rate will go up and GDP growth will get affected", he added.

One immediate impact of a hike in reverse repo rates would be an increase in the short-term interest rates and call money rates. It would also act as a signal to banks to increase their advance rates, said a dealer. "People are interpreting the quarterly reviews as a signal that probably our rates must align with global rates," he said.