BackRBI revises liquidity management framework
Starting 5 September, RBI will conduct 14-day term repurchase auctions four times a fortnight
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Mumbai: The Reserve Bank of India (RBI) on Friday announced a revised liquidity management framework as a way to check volatility in the inter-bank call money markets, where banks lend to each other, and also allow the lenders to manage their liquidity needs better.
Starting 5 September, RBI will conduct 14-day term repurchase auctions four times a fortnight, up to an aggregate amount equal to 0.75% of the system’s deposit base or net demand and time liabilities (NDTL).
Unlike earlier, RBI has announced a fixed schedule for these 14-day term repo operations, which are used by banks for their day-to-day liquidity requirements. One-fourth of the total amount of 0.75% of NDTLs would be put up for auction in each of the four auctions, RBI said in a statement.
There will be no change in the amount that banks can access from the liquidity adjustment facility (LAF) window at fixed repo rate of 8%. Banks are currently allowed to borrow up to 0.25% of their deposit base or NDTL from the LAF window.
Additionally, RBI said it will conduct overnight variable rate repo auctions based on an assessment of liquidity in the system and government cash balances available for auction for the day.
“The RBI may announce special variable-rate short-term repo/reverse repo auctions at short notice to take care of fast-changing liquidity conditions at any time during the day," said the central bank in its statement, adding that it will also manage “liquidity movements of a more durable nature through open market operations and forex operations."
The central bank’s latest measures on liquidity are likely to bring stability to the overnight call rates as banks can now plan their daily liquidity requirement better, said Arun Khurana, country head group markets group at IndusInd Bank Ltd.
“The call rate will come down to around 15 to 20 basis points (bps) of the repo rate. The RBI has always said that they will ensure liquidity at all times and this is just conforming that. The daily 3 to 3.30 pm variable repo auction will also lend stability to overnight rates," Khurana said. One basis point is 0.01%.
RBI measures follow an increased volatility in the overnight call market since RBI shifted to a seven-day and 14-day repo format. The overnight rate has recently had a tendency to move 1% higher or 1% lower than the 8% repo rate as banks grappled with borrowing seven-day and 14-day money to fulfill their daily liquidity requirements.
RBI’s announcement comes after governor Raghuram Rajan in his post-policy interaction with the media earlier this month had acknowledged a “certain amount of volatility" in the overnight call rates.
“What we are looking at is the possibility of doing more frequent term repos or shortening the maturity of term repos and perhaps also thinking about the timing of the auctions during the days so as to minimise volatility," Rajan had said.
The latest RBI repo plan makes borrowing for banks more “systematic," according to Ashish Parthasarthy, treasurer at HDFC Bank Ltd.
“It could reduce the volatility in the call rate," Parthasarthy said. “But the difference for banks will only be marginal because they will still have to borrow 14-day money."
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