Focus: GS-III Indian Economy
Why in news?
The Reserve Bank of India (RBI) has decided to advance the first of the two variable rate term repo auctions to March 26 from March 30.
- On a review of the rapidly evolving financial conditions and taking into account the impact of disruptions caused by COVID-19, it has been decided to advance the first auction scheduled for March 30, 2020 to March 26, 2020.
- As a special case, standalone primary dealers (SPDs) were also allowed to participate in these auctions along with other eligible participants.
- It has been decided to temporarily enhance liquidity available to SPDs under the Reserve Bank’s Standing Liquidity Facility (SLF) from ₹2,800 crore to ₹10,000 crore with immediate effect, in order to facilitate year-end liquidity management by SPDs.
- This enhanced facility will be available till April 17, 2020, the RBI said.
What is Repo?
- A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities.
- In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
- That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital.
- They are also a common tool of central bank open market operations.
- For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.
An auction conducted by the central bank of a country (RBI in Indian context) to inject cash into banking system. Central Bank(RBI) lends money to commercial banks. Commercial banks deposit government and listed corporate bonds as collateral.
Reverse Repo Auction
An auction conducted by the central bank of a country to remove excess cash from the banking system. Here central bank issues sovereign bonds to absorb the excess liquidity. Commercial banks can buy these bonds because they will get some interest on their excess deposits.