MUMBAI, Feb 17 (Reuters) - The Reserve Bank of India'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 1 trillion rupees ($14.03 billion) via long-term repos at a fixed rate of 5.15% which is the current repo rate.
The RBI conducted the first such auction for 250 billion rupees for 3-year funds earlier today with banks bidding for 1.94 trillion rupees worth of funds. The RBI made an allotment of 12.86% on the 63 bids it received for 250.35 billion rupees.
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 benchmark 3-year benchmark bond yield IN3YT=RR at 5.78%, 3-year funds at 5.15% was 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 1-year funds totalling 250 billion rupees on Feb. 24 but traders said that auction may not see as hefty demand as the 3-year one.
"There are likely to be only four auctions, so demand at all four will be high but 1-year funds are not as attractive as 3-year funds. 1-year auction will be mostly for the banks' asset-liability management desks," another senior fixed income trader at a private bank said. ($1 = 71.2880 Indian rupees)