Liquidity Operations by RBI

Liquidity Adjustment Facility: As part of the financial sector reforms in 1998 the Committee on Banking Sector Reforms (Narasimham Committee II), Liquidity Adjustment Facility (LAF) was introduced under which the Reserve Bank would conduct auctions periodically, if not necessarily daily. The Reserve Bank could reset its Repo and Reverse Repo rates which would in a sense provide a reasonable corridor for the call money market. At present, daily LAF operations are being conducted on overnight basis, in addition to term repo auctions.

Repurchase Agreement (Repo): Repo is a money market instrument combining elements of two different types of transactions viz., lending-borrowing and sale-purchase. The Repo transaction has two legs, which can be explained as follows – in the first leg: Seller sells securities and receives cash while the purchaser buys securities and parts with cash. In the second leg: Securities are repurchased by the original holder. He pays to the counter party the amount originally received by him plus the return on the money for the number of days for which the money was used by him which is mutually agreed. Under Repo, the Reserve Bank of India injects funds to organisations (SCBs and Primary Dealers) which have both current account and SGL account with the Reserve Bank of India.

Reverse Repo: This is exactly the opposite of the Repo transaction and is used for absorption of liquidity. The Reverse Repo Rate at present is at 100 basis points below the repo rate. Reverse Repo facility is available to Primary Dealers also.

Marginal Standing Facility: The Reserve Bank, in 2011, introduced Marginal Standing Facility (MSF) for banks and primary dealers to reduce the volatility in the inter-bank call money market. The interest rate was fixed at 100 bps above the repo rate, which is the rate at which banks borrow from the RBI for the short term against the collateral of government securities. The rate may vary relative to the repo rate as warranted by economic conditions.

Standing Liquidity Facilities: The Reserve Bank provides Standing Liquidity Facilities to the Scheduled commercial banks (excluding RRBs) under the Export Credit Refinance Facility (ECR) and to the stand-alone Primary Dealers. On the basis of banks’ eligible outstanding rupee export credit (pre-shipment and post-shipment), the Reserve Bank provides ECR facility to banks. All SCBs (excluding RRBs) who have extended export credit are eligible to avail the facility. Banks submit the ECR return to the Reserve Bank on fortnightly basis. The export credit refinance limit is computed for each bank, based on their outstanding export credit eligible for refinance as at the end of the second preceding fortnight. At present, ECR refinance limit is set at 50 per cent of eligible export credit outstanding. ECR is provided at the Repo rate. The ECR is repayable on demand or on the expiry of fixed periods not exceeding one hundred and eighty days.

Term repos: Term repo is a new window for providing liquidity to the banking system. Through Term repo auctions of 7-day and 14-day tenors for a combined notified amount equivalent to 0.75 (at present) per cent of net demand and time liabilities (NDTL) of the banking system are conducted by the Reserve Bank through variable rate auctions on every Friday, since the beginning of October 11, 2013. Additional term repos of tenors ranging from 5-day to 28-day have also been auctioned on the basis of periodic assessment of liquidity conditions. The notified amount and tenor of the term repo auctions is being announced prior to the dates of the auctions.

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