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RBI\'s three-year repo auction sees hefty demand
Photo Credit: Reuters

The Reserve Bank of India (RBI)'s first-ever long-term repo operation (LTRO) saw massive demand on Monday with banks bidding for 7.8 times the funds on offer.

The central bank had announced that it will auction funds worth a total Rs 1 trillion ($14.03 billion) via long-term repos at a fixed rate of 5.15% which is the current repo rate.

The funds are expected to help lower banks' cost of funds and prompt them to lend to customers in an effort to boost consumption and kickstart the flagging economy.

"We had expected 4x bid cover ratio. The demand is quite strong. It reflects that the terms of the LTRO are quite attractive," said A Prasanna, economist with ICICI Securities Primary Dealership.

Traders said with the three-year benchmark bond yield at 5.78%, three-year funds at 5.15% were highly attractive and offered a straight yield arbitrage.

"Banks can also buy corporate bonds with the money and get an extra spread," a senior trader with a private bank said.

Bankers said the funds would cover several rate resetting cycles for banks and thus will also be used for lending purposes.

The RBI will be conducting a second auction for one-year funds totalling Rs 250 billion on February 24 but traders said that auction may not see as hefty demand as the three-year one.

"There are likely to be only four auctions, so demand at all four will be high but one-year funds are not as attractive as three-year funds. One-year auction will be mostly for the banks' asset-liability management desks," another senior fixed income trader at a private bank said.

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