Banks have been borrowing heavily from the Tri-Party Repo (TREPS) market and deploying those funds into the Standing Deposit Facility (SDF) of the Reserve Bank of India (RBI), which is offering higher interest rate than the former, leading to increased volumes in the SDF window.
The weighted average TREPS rate was trading at 5.66 per cent on Monday, 9 basis points lower than the SDF rate which currently stands at 5.75 per cent.
The SDF window, which came into effect from April 2022, offers 25 bps lower than the policy repo rate.
In the overnight market, volumes in TREPS are much higher than in the call money market.
Banks borrowed over Rs 4 trillion from TREPs on Monday.
Banks parked Rs 2.3 trillion under the SDF window on Sunday, according to the latest data by the RBI.
On April 3 of the current year, banks had parked a record Rs 4.13 trillion with the RBI under the SDF.
After the first policy repo rate cut of 25 bps by RBI in February, the spread between TREPs rate and SDF was 30 bps.
It narrowed to around 15 basis points after the second repo rate cut of another 25 bps in April, said market participants.
The overnight rate fell below the SDF rate after liquidity in the banking system turned surplus in early April.
“The volume in SDF has been high because banks have been booking profit by borrowing from TREPS and parking in SDF,” said a market participant.
"The banks, especially the public sector banks, have excess SLR with them, which they are deploying in TREPS,” the person added.
The net liquidity in the banking system was in a surplus of Rs 2.3 trillion on Sunday, latest data by the RBI showed.
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