14-day Term Repo Auctions

14-day Term Repo Auctions are an important monetary policy instrument used by the Reserve Bank of India (RBI) to manage short-term liquidity in the banking system. They play a critical role in ensuring financial stability, smooth transmission of monetary policy, and efficient functioning of money markets in India. Introduced as part of liquidity management reforms, these auctions complement traditional repo operations and are particularly significant during periods of liquidity stress or surplus.
The instrument has gained prominence in the post-global financial crisis period and during extraordinary events such as demonetisation and the COVID-19 pandemic, when calibrated liquidity support became essential for maintaining confidence in the banking and financial system.

Concept and Definition of 14-day Term Repo Auctions

A 14-day Term Repo Auction is a liquidity facility through which the RBI lends funds to scheduled commercial banks for a fixed tenor of fourteen days against eligible collateral, primarily government securities. Unlike overnight repo operations, which are short-term in nature, term repo auctions provide liquidity for a longer, pre-specified period.
In a repo transaction, banks sell government securities to the RBI with an agreement to repurchase them at a future date at a predetermined price. The difference between the sale and repurchase price represents the interest cost, known as the repo rate. In the case of 14-day term repos, the interest rate is generally determined through an auction process rather than being fixed at the policy repo rate.

Background and Evolution in India

The use of term repos in India was recommended by the Urjit Patel Committee on Monetary Policy Framework in 2014. The committee emphasised the need to shift from discretionary liquidity management to a rule-based framework aligned with policy signals.
Traditionally, the RBI relied heavily on overnight liquidity adjustment facility (LAF) repos. However, excessive dependence on overnight liquidity led to volatility in money market rates and weakened monetary policy transmission. To address this, the RBI introduced term repo auctions of varying maturities, with the 14-day tenor becoming the most prominent.
Over time, 14-day term repos have evolved into a regular liquidity management tool, especially during periods when durable liquidity support is required without committing to long-term open market operations.

Operational Mechanism

The RBI conducts 14-day term repo auctions through an electronic auction platform. Scheduled commercial banks submit bids indicating the amount of funds required and the interest rate they are willing to pay.
Key operational features include:

• Auctions are generally conducted on a fortnightly or as-needed basis.
• Eligible collateral mainly consists of central and state government securities.
• The cut-off rate is determined based on competitive bidding.
• Funds are provided for exactly fourteen days, after which banks must repay the principal along with interest.

The auction-based nature allows market forces to determine the cost of funds, reflecting prevailing liquidity conditions in the banking system.

Objectives of 14-day Term Repo Auctions

The primary objectives of 14-day term repo auctions include stabilising short-term interest rates, improving liquidity predictability, and strengthening monetary policy transmission.
By providing assured liquidity for a fixed period, the RBI enables banks to manage their asset-liability mismatches more efficiently. This reduces uncertainty in funding costs and promotes orderly conditions in money markets. Additionally, term repos reduce excessive reliance on overnight borrowing, thereby smoothing interest rate movements.

Role in Banking and Financial Markets

In the banking sector, 14-day term repo auctions serve as an important source of short-term funding, particularly during tight liquidity conditions. Banks facing temporary mismatches due to credit expansion, tax outflows, or regulatory requirements can access funds without resorting to distress borrowing.
For financial markets, these auctions contribute to:

• Stability in call money and tri-party repo markets
• Better alignment of short-term rates with the policy stance
• Enhanced confidence among market participants

They also support efficient functioning of the government securities market by encouraging banks to hold and actively use sovereign bonds as collateral.

Significance for Monetary Policy Transmission

Effective monetary policy transmission depends on how quickly and smoothly policy rate changes influence market interest rates and bank lending rates. 14-day term repo auctions play a vital role in this process.
When the RBI signals an accommodative or tightening stance, the auction rates of term repos adjust accordingly. Banks incorporate these funding costs into their lending and deposit rate decisions. As a result, changes in the policy repo rate are transmitted more effectively to the broader economy.
The instrument also reduces volatility caused by transient liquidity shocks, ensuring that short-term rates remain anchored around the desired policy corridor.

Impact on the Indian Economy

At the macroeconomic level, 14-day term repo auctions support economic stability by ensuring adequate liquidity for productive activities. During periods of economic slowdown, increased use of term repos helps maintain credit flow to businesses and households.
In times of financial stress, such as during the COVID-19 pandemic, enhanced term repo operations provided critical liquidity support to banks, enabling them to lend to priority sectors and support government relief measures. This helped mitigate systemic risk and prevent disruption in financial intermediation.
Conversely, during periods of excess liquidity, reduced reliance on term repos helps prevent overheating and inflationary pressures.

Comparison with Other Liquidity Instruments

14-day term repo auctions differ from other liquidity instruments in several ways. Overnight repos address very short-term liquidity needs, while open market operations influence durable liquidity over a longer horizon.
Marginal Standing Facility (MSF) acts as a penal, last-resort borrowing option, whereas term repos are proactive and market-based. Compared to long-term repo operations (LTROs), 14-day term repos are shorter in duration and more flexible, making them suitable for routine liquidity management.
This combination allows the RBI to fine-tune liquidity conditions with precision.

Advantages and Limitations

The advantages of 14-day term repo auctions include enhanced liquidity predictability, reduced interest rate volatility, and improved monetary policy transmission. They encourage disciplined liquidity management among banks and deepen money market development.
However, there are limitations. Overuse of term repos may create dependency on central bank funding and reduce incentives for banks to mobilise stable deposits. Additionally, during periods of extreme stress, auction-based rates may not fully reflect policy intent, requiring supplementary measures.