RBI revamps liquidity management system

The old system had guaranteed banks and primary dealers refinance at fixed rates, diminishing the central bank’s role as a lender of the last resort.

The LAF will include repo auctions and reverse repo auctions. Only banks and primary dealers (PDs) maintaining statutory general ledger (SGL) and current accounts with the RBI in Mumbai will be eligible to participate in the auction.

The RBI proposes to conduct auctions on all working days from Monday to Friday. The settlement will take place on the same day. The repo auctions will be for one-day, except on Fridays when it will be for three days or more, maturing on the following working day. "In the first stage, with effect from June 5, 2000, the additional collateralised lending facility and level II support to primary dealers will be replaced by variable rate repo auctions with same day settlement," the RBI said.

It said the second stage will replace the collateralised lending facility or level I liquidity support, both at bank rate currently, with variable rate repo auctions. "In the proposed LAF, the quantum of adjustment and also the rates would be flexible, responding immediately to the needs of the system," it said,

Funds made available would primarily meet the day to day liquidity mismatches in the system and not the normal financing requirements of the eligible institutions, the RBI said. "It is expected that the LAF would also help the short-term money market interest rates to move within a corridor and impart greater stability, facilitating emergence of a short-term rupee yield curve," the RBI said.

CRR balance: The RBI has proposed to reduce commercial banks’ requirement of a minimum cash reserve ratio (CRR) daily balance to 65 per cent from the current 85 per cent with effect from May 6. "This is expected to result in smoother adjustment of liquidity between surplus and deficit units and enable better cash management by banks," the RBI said in its credit policy statement.

Currently, banks are required to maintain a minimum of 85 per cent of their CRR requirements for the reporting period daily. Banks report their CRR balances to the central bank on alternate Fridays. The RBI move is expected to give banks more flexibility in managing their cash balances during a reporting period. Some bankers had expected the central bank to set a timetable for a phased reduction in the CRR. The RBI on Thursday left the CRR unchanged at eight per cent.

CD maturity: The RBI on Thursday said it was reducing the minimum maturity on certificates of deposits (CDs) to 15 days from the current three months. The RBI announced its monetary and credit policy for 2000/01 (April-March) on Thursday.

The central bank said this was being done to bring CDs, which are issued by banks, on par with other instruments like commercial paper and term deposits. The RBI policy also said the restriction on fixed rate term loans being extended only for project finance was being withdrawn. "Banks will henceforth have the freedom to offer all loans on fixed or floating rates," the RBI said.

To give banks greater flexibility in operating their foreign currency non-resident deposits (FCNR(B)), the RBI said banks could at their discretion use the current swap rates on those deposits. Banks so far had to use swap rates prevailing on the last working day of the preceding week as the base for fixing caps on FCNR(B) deposit rates.

EXPORT CREDIT REFINANCE: The RBI has relaxed the export credit refinance facility for banks effective May 6. The central bank said currently scheduled commercial banks are provided export credit refinance to the extent of 100 per cent of the increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996.

This was proposed to be liberalised by taking the outstanding export credit limit as the basis for fixing refinance limits which will enable banks to use rediscounting of export bills without any reduction in refinance limits, RBI said.

FOREX MARKET: The central bank said it was permitting the use of foreign exchange forward market rates as an additional benchmark for pricing rupee interest rate derivatives. Forward rate agreements and interest rate swaps were introduced in Indian money markets in 1999, and so far only domestic money or debt market rates could be used as benchmarks.

"In order to provide more flexibility for pricing of rupee interest rate derivatives and to facilitate some integration between money and foreign exchange markets, the use of `interest rates implied in the foreign exchange forward market’ as a benchmark would be permitted in addition to the existing domestic money and debt market rates," the policy statement said.