* Short rates drop on delayed impact of reverse repos
* Traders see reduced demand for short-term borrowing
* Short rates now have little room to fall further
* Longer rates less affected as uncertainty remains
By Gabriel Wildau
SHANGHAI, Oct 10 (Reuters) - China's key money rate plummeted on Wednesday as the cash from Tuesday's central bank fund injection hit the market and traders reported anaemic demand for liquidity.
The benchmark weighted-average seven-day bond repurchase rate
tumbled 60 basis points to 3.1611 percent near midday, erasing most of its rise over the last two days.
"Demand was pretty heavy yesterday, so the rate couldn't fall that much, but today no one is borrowing," said a trader at a joint-stock bank in Beijing.
The overnight rate also slid steeply, shedding 70.88 bps and dropping below the psychologically important 3.0 percent mark to 2.6583 percent near midday.
The People's Bank of China injected 265 billion yuan ($42.2 billion) into the interbank market via reverse repos on Tuesday, its second-largest one-day injection ever. The overnight rate responded quickly, but the benchmark seven-day rate fell only slightly on Monday.
That left some analysts wondering if the PBOC's continued reliance on reverse repos - rather than a cut in banks' required reserve ratio (RRR) - to manage liquidity was losing its effectiveness.
But similar delayed responses have occurred frequently in recent weeks. Rates fell only slightly after huge fund injections via reverse repos on September 25 and 27. Rates fell substantially only on the days following the injections.
"Yesterday morning the market opened high, and transactions were very brisk, so the market basically followed that trend. But rates actually started to fall in the afternoon," said a trader at a city commercial bank in east China.
Following Tuesday's fall, the seven-day repo rate is now below the 3.35 percent yield on the central bank's seven-day reverse repos
Previously, traders had said that the central bank's reverse repo yield - which represents the rate at which commercial banks borrow from the central bank - effectively placed a floor under the rate at which commercial banks will lend to each other.
However, traders now say that if liquidity from other sources is ample, while demand for loans is weak, the market rate can fall below the reverse repo rate.
The one-month repo rate , at 3.7965 percent , remains above the one-month reverse repo yield
3.60 percent. That suggests that banks remain relatively cautious about lending at longer tenors due to uncertainty about liquidity conditions in the coming weeks.
Indeed, traders say that after Tuesday's drops, the overnight and seven-day rates have little room to fall further.
Current Prev close Change (pct) (bps) 7-day repo 3.1611 3.7611 -60.00 7-day SHIBOR 3.1600 3.7508 -59.08
Note: Repo rate is weighted average.
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($1 = 6.2872 Chinese yuan) ($1 = 6.2878 Chinese yuan) (Editing by Kim Coghill)
Keywords: MARKETS CHINA BONDS/