Banks Exploit TREPS-SDF Rate Spread for Risk-Free Gains

Liquidity-rich banks are capitalizing on TREPS-SDF rate spreads for short-term, risk-free profits. With TREPS rates influenced by liquidity and demand, banks are securing higher returns by investing funds with RBI. The absence of RBI's VRRR operations allows banks to maintain strategies leveraging surplus liquidity.

Banks, particularly those with high liquidity levels, are actively leveraging the Tri-Party Repo (TREPS) market to secure funds at relatively lower interest rates. They then strategically deploy these resources with the Reserve Bank of India (RBI) under the standing deposit facility (SDF) to achieve higher returns, capturing a risk-free spread, according to financial dealers on Tuesday.

The opportunity for banks to earn up to a 0.70 percent spread arose from the fluctuating gap between the SDF and TREPS rates. TREPS, a collateralized money market segment, involves lending and borrowing among banks and mutual funds, with the latter primarily engaging as lenders. The rates in this market segment respond to liquidity conditions, demand-supply dynamics, regulatory obligations, and overall market moods.

The spread between these rates has shown significant fluctuation, increasing interest in this strategy, especially among liquidity-rich banks. Financial experts highlight that recent liquidity infusion measures by the RBI, coupled with the absence of Variable Rate Reverse Repo (VRRR) operations, have resulted in overnight market rates below the SDF rate, favoring ongoing bank strategies.

(With inputs from agencies.)