Second Daily Repo Auction

The Second Daily Repo Auction is an important liquidity management tool used by the Reserve Bank of India to address short-term mismatches in the banking system. In the context of banking, finance, and the Indian economy, it represents a supplementary monetary policy instrument designed to ensure adequate liquidity during periods of stress or uneven cash flows. By providing banks with an additional window to access funds, the second daily repo auction enhances stability in money markets and supports the smooth functioning of the financial system.
This mechanism reflects the increasing sophistication of monetary operations in India, where flexible and responsive tools are employed to manage liquidity conditions without altering long-term policy signals.

Concept and Meaning of Second Daily Repo Auction

A repo auction refers to a transaction in which banks borrow funds from the central bank by selling securities with an agreement to repurchase them at a future date. The Second Daily Repo Auction is an additional repo operation conducted by the Reserve Bank of India on the same day, over and above the regular daily repo operation.
Its primary purpose is to provide temporary liquidity support to banks when system liquidity tightens unexpectedly during the day. Unlike the main repo auction, which signals the stance of monetary policy, the second daily repo auction is essentially a liquidity adjustment tool and does not indicate a change in policy direction.

Background and Rationale

The introduction of the second daily repo auction was driven by the growing complexity of India’s financial system and the increasing volatility in liquidity conditions. Factors such as large government cash balances, uneven tax outflows, capital flows, and payment system demands can create sudden liquidity shortages within a single trading day.
To address these intraday or end-of-day liquidity pressures, the Reserve Bank of India introduced the second daily repo auction as part of its refined liquidity management framework. The objective was to prevent short-term liquidity stress from disrupting money markets or pushing overnight interest rates away from the policy corridor.

Operational Framework

The second daily repo auction is conducted by Reserve Bank of India under the Liquidity Adjustment Facility. It is usually announced when liquidity conditions warrant additional intervention beyond the regular repo operation.
Banks participate by submitting bids indicating the amount of funds required and the interest rate they are willing to pay, subject to the ceiling of the prevailing repo rate. The auction is typically of very short maturity, often overnight, ensuring that liquidity support remains temporary and targeted.

Distinction from Regular Repo Auction

While both the regular repo auction and the second daily repo auction involve the provision of liquidity against collateral, their roles differ in emphasis. The regular repo auction is the primary tool for signalling the monetary policy stance and managing day-to-day liquidity.
The second daily repo auction, on the other hand, is reactive and situational. It is conducted only when necessary to address unexpected liquidity pressures. As such, it does not carry the same signalling effect as changes in policy rates or the main repo operation.

Role in the Banking System

In the banking system, the second daily repo auction provides an important safety valve. Banks facing sudden liquidity shortages due to payment obligations or settlement requirements can access funds without resorting to distress borrowing from the interbank market.
This facility helps maintain confidence among banks and prevents temporary liquidity mismatches from escalating into systemic stress. By ensuring that solvent banks are not constrained by short-term liquidity issues, the auction supports overall financial stability.

Importance in Money Markets

The second daily repo auction plays a stabilising role in money markets, particularly in the overnight segment. By injecting liquidity when needed, it helps keep overnight interest rates aligned with the policy corridor set by the Reserve Bank of India.
Stable money market rates are essential for effective monetary transmission. When overnight rates remain close to the policy rate, changes in monetary policy are more efficiently transmitted to other interest rates in the economy.

Relevance to Monetary Policy Transmission

Although the second daily repo auction is not a policy signalling tool, it indirectly supports monetary policy transmission. By smoothing liquidity conditions, it ensures that short-term interest rates reflect policy intentions rather than temporary liquidity distortions.
This enhances the credibility and effectiveness of the monetary policy framework. Banks are better able to price loans and deposits when money market rates are stable and predictable.

Impact on the Financial System

The availability of a second daily repo auction reduces volatility in financial markets. It reassures market participants that the central bank is willing and able to address short-term liquidity stress promptly.
This confidence is particularly important during periods of financial uncertainty, such as during large government cash withdrawals, financial market disruptions, or sudden capital flow movements. The mechanism thus contributes to resilience in the financial system.

Significance in the Indian Economy

In the broader Indian economy, the second daily repo auction supports uninterrupted credit flow and smooth functioning of payment and settlement systems. By preventing liquidity shortages from affecting banks’ lending capacity, it helps sustain economic activity.
Efficient liquidity management also supports fiscal operations and financial market development. As India’s economy grows and financial transactions increase in scale and complexity, tools such as the second daily repo auction become increasingly significant.