India’s monetary authority Reserve Bank of India (RBI) said in a notification that it would conduct a special repo auction for Rs 6,000 crore on Monday. The reversal of the repo would occur on September 22. The special repo by the RBI is a part of its effort to ease the credit amiability for targeted sectors, which faced severe problems in the aftermath of the global financial crisis last year.
In order to help the mutual fund industry tackle the redemption pressure, the central bank introduced the special repo facility on a daily basis with effect from October 14, 2008, offering Rs 2,000 crore everyday. The size of the lot was later increased to Rs 6,000 crore later to include the liquidity needs of non-banking financial companies and housing finance companies.
As the economy stabilized and liquidity situation normalized, the bank decided to cut the frequency of the repo. In its annual review of monetary policy, the apex bank said in April 2009 that it would conduct the special repo on weekly basis which would continue till March 2010, when next review would happen.
One of reason behind RBI looking to continue to special repo is government’s record borrowings this year at Rs 4.51 lakh crore which may result in abundant liquidity in the market getting channelised into sovereign debt, leaving lesser amount available for other parties. Also, while the RBI believes that global economy has started to stabilize, it would still like to continue with protective measures to counter the threat of a second dip in the global downturn.