MC EXCLUSIVE For banks, arbitrage in TREPS market is opening doors to an easy money route

TREPS arbitrage

Several lenders are using the arbitrage opportunity between the tri-party repo (TREPS) borrowing market and the standing deposit facility (SDF), during the last 6-8 weeks, bank treasury heads have told Moneycontrol, apparently as a means to earn extra treasury gains at almost no cost.

A rough back-of-the-envelope calculation reveals that the arbitrage may be benefiting banks to earn around 20-30 basis points (bps) extra income by borrowing funds from TREPS - a collateral-based short-term borrowing market - at lower rates against government securities and parking the funds with SDF at higher rates. The Standing Deposit Facility (SDF) helps the Reserve Bank of India (RBI) absorb surplus liquidity from the banking system without requiring banks to provide collateral.

Currently, weighted average rate in the TREPS market is 5.65 percent, which is almost 10 bps lower than RBI’s SDF rate. TREPS is a market where mutual funds and banks borrow and lends to each other, though mutual funds tend to be more active in the market. Rates in the TREPS market is determined by various factors such as demand and supply for short-term liquidity in money market, market sentiments, government policies, regulatory requirements and inter-bank market rates.

A treasury head at a state-owned bank told Moneycontrol that the opportunity of arbitrage was created after TREPS rates started falling after the Reserve Bank of India (RBI) started its rate cut cycle in February. Factors which added to higher activity include surplus liquidity in the banking system and the persistent liquidity support provided by the RBI.

Consequently, rates on the TREPS platform reduced to 5.75 percent in May compared to 6.4-6.5 percent seen in February, ahead of the rate cut cycle. SDF, on the other hand, has a fixed rate determined by the RBI, which presently stands at 6 percent.

After the first RBI rate cut of 2025 in February, banks enjoyed 10-33 bps higher spread in treasury income due to the arbitrage in TREPS market, while after the second rate cut, the arbitrage shrunk a bit to 10-18 bps. That said, a treasury head state-owned bank said that on an intra-day basis, gains from arbitrage could be as high as 60 bps. “Higher arbitrage will sharply increase treasury incomes of banks in the current quarter,” the banker added.

Nonetheless, banks are parking more funds in the SDF market instead of participating in the call money market, a trend which seems to have caught the attention of RBI. The regulator has been nudging banks to lend in the call money market to make markets deeper, and improve price discovery, though banks are continuing to park more money in the SDF market.

Going ahead, money market experts see this arbitrage opportunity sustaining as there is expectation of another 50 bps repo rate cut by the RBI in June, which may further lower rates in the money market below the SDF rate.

On April 9, the central bank reduced the key repo rate by 25 bps, the second consecutive rate cut since February this year citing a benign inflation outlook and moderate growth. RBI also shifted its stance from ‘neutral’ to ‘accommodative’.