The People's Bank of China's open market operations room announced on July 24 that to better align with banks' short-term liquidity needs, it will conduct overnight reverse repo operations from July 29 to July 31 and on August 3. These operations will use a fixed rate and a quantity-based bidding system. The daily volume will be 600 billion yuan from July 29 to July 31, and 300 billion yuan on August 3.

Historical data on the overnight interbank pledged repo rate shows the rate typically trends higher at the end of the month and declines at the start of the next month, reflecting increased demand for funds in the money market at month-end.

Wang Qing, Chief Macro Analyst at Golden Credit Rating, pointed out that this means the volatility of the DR001 at the end of July will be more effectively controlled, promoting the stable operation of short-term rates near the policy rate.

The team of Ming Ming, Chief Economist at CITIC Securities, noted that this overnight reverse repo operation is still part of the month-end liquidity support, and the 7-day reverse repo rate remains the primary policy rate.

Ming Ming's team indicated that this overnight reverse repo operation is similar to the one in June, using an advanced announcement method. Furthermore, the overnight reverse repo continues with a fixed rate and quantity-based bidding model, and the winning rate has not been disclosed. This shows the operation is still part of month-end liquidity support, with the 7-day reverse repo rate being the main policy rate.

Ming Ming's team also observed that from the perspective of liquidity support timing, a net injection of 600 billion yuan on July 29 will support funds crossing the month-end. On the last day of the month, most institutions would have already prepared sufficient cross-month funds, so flat operations meet actual needs. The choice of a 300 billion yuan injection on August 3 likely aims to avoid a significant impact on the money market and bond market from the concentrated maturity of 7-day and overnight reverse repos that day. Overall, this overnight reverse repo operation announcement demonstrates a supportive attitude toward market liquidity. Although current funds are relatively stable, the unwavering support from overnight reverse repos may also be a forward-looking measure to hedge against the potential impact of future funding pressures on market expectations. Changes in the supply rhythm of government bonds in August warrant attention.

Wang Qing stated that the central bank previously announced on July 15 it would "study gradually increasing the frequency of overnight reverse repo operations and communicate with the market." The frequency of overnight reverse repo operations around the end of July has doubled compared to the end of June, and the central bank communicated this in advance, as expected. This means the volatility of the DR001 at the end of July will be more effectively controlled, promoting the stable operation of short-term rates near the policy rate.

Wang Qing further analyzed that the overnight reverse repo operation on August 3 is mainly because that day is a Monday, when a large amount of 7-day reverse repos will mature. Previously, the central bank mainly used 7-day reverse repos to hedge against such short-term funding needs. This time, switching to overnight reverse repos can improve liquidity management efficiency, reduce costs for financial institutions, and avoid liquidity accumulation.

Wang Qing emphasized that this announcement of four overnight reverse repo operations around the end of July only disclosed the quantity but not the operation interest rate level, showing that the current overnight reverse repo mainly plays a role in short-term liquidity adjustment, not price control. The current primary policy rate remains the central bank's 7-day reverse repo operation rate.

From the perspective of the money market, on July 24, the closing price of DR001 was 1.3939%, and the closing price of DR007 was 1.4090%. Both saw increases from the previous trading day.

Looking at the interbank lending market, on July 24, the weighted average rate of DIBO001 was 1.3952%, and the weighted average rate of DIBO007 was 1.4201%. Both also rose from the previous trading day.

At a recent State Council Information Office press conference, Zou Lan, spokesperson for the People's Bank of China and Deputy Governor, explained that in recent years, the proportion of overnight products in money market repo transactions has approached 90%. Overnight financing has become an important tool for financial institutions' liquidity management, and market demand is substantial, especially at points with large short-term demand fluctuations like month-end. To further improve the interest rate control mechanism and enrich the range of tool maturities, the central bank has increased overnight reverse repo operations to better match financial institutions' short-term liquidity needs. The first operation was conducted at the end of June, with 300 billion yuan and 600 billion yuan on June 29 and 30, respectively.

Zou Lan introduced that overnight reverse repo operations can play a "shaving peaks and filling valleys" role at certain special points in time. Some institutions may only have short-term liquidity needs for two or three days. If the central bank only conducts 7-day reverse repo operations, there could be some liquidity accumulation. In such cases, conducting overnight reverse repo operations can improve liquidity management efficiency and reduce costs for financial institutions. Currently, the focus of overnight reverse repo operations is not on the interest rate but on the ability to adjust ultra-short-term liquidity. At this stage, the 7-day reverse repo operation rate is still the main policy rate and has effectively served as a market pricing anchor based on practical results.

"Compared to the central bank's operation volume, the short-term market rate level is a more suitable observation indicator," Zou Lan said.

He also mentioned that going forward, the People's Bank of China will continue to promote the reform and improvement of the monetary policy operation framework smoothly and orderly, better guiding market overnight rates to operate stably near the policy rate. Considering the needs of primary dealers, the central bank will study gradually increasing the frequency of overnight reverse repo operations and communicate with the market.