Ref. IDMC.No.4376 /03.75.00/2000-01 May 3, 2001 To, All
Primary Dealers and Scheduled Commercial Banks (excluding RRBs) Dear Sirs, Sub:
Scheme of Liquidity Adjustment Facility: 2001-2002 As
announced in the Statement on Monetary and Credit Policy for the year 2001-02,
the existing Liquidity Adjustment Facility has been reviewed and certain amendments
have been made. The revised Scheme will be made effective from May 8, 2001. Please
find enclosed a copy of the revised Scheme. Yours
faithfully, (T. C. Nair)
Chief General Manager Encl:
As above As indicated
in April 2000 Policy Statement, the scheme of Liquidity Adjustment Facility (LAF)
is being introduced progressively in three convenient stages in order to ensure
smooth transition. In the first stage, with effect from June 5, 2000, variable
rate Repo auctions with the same day settlement were introduced replacing the
Additional Collateralised Lending Facility (ACLF) to banks and Level II support
to Primary Dealers (PDs). The second stage of LAF envisages replacement of Collateralised
Lending Facility (CLF) to banks and Level I support to PDs by variable rate Repo
auctions. It was indicated that the effective date for the second stage would
be decided in consultation with banks and PDs. Taking the above factors into consideration
and on the basis of experience gained in operating LAF coupled with wide ranging
consultations with the market participants, it has been decided to revise the
earlier LAF Scheme, circulated vide our letter No. 3968/03.75.00/99-2000 dated
May 29, 2000. The main features of the revised Scheme, known as LAF Scheme 2001-2002,
are as under: 1. The Scheme
Under the scheme, (i) Repo auctions (for absorption of
liquidity) and (ii) Reverse Repo auctions (for injection of liquidity) will be
conducted on a daily basis (except Saturdays). But for the intervening holidays
and Fridays, the Repo tenor will be one day. On Fridays, the auctions will be
held for three days maturity to cover the following Saturday and Sunday. The funds
under LAF are expected to be used by the banks for their day-to-day mismatches
in liquidity. 2. Fixed rate Repo
auction RBI will henceforth
have an additional option to switchover to fixed rate Repos on overnight basis;
but this option is expected to be sparingly used. For the purpose of such Repos,
the rates of interest intended to be offered would be announced as part of auction
announcement on the previous evening or before 10.00 a.m. on the day of auction,
if necessary. 3. Long term Repo In
addition to overnight Repos, RBI will also have the discretion to introduce longer-term
Repos up to 14 day period as and when required. 4.
Rate of Interest At present, auctions under LAF are
conducted on ''uniform price'' basis. It has been decided to introduce ''multiple
price'' auction, in place of existing uniform price auction on an experimental
basis for one month period during May 2001. Interest rates in respect of both
Repos and Reverse Repos will be, accordingly, based on the bids quoted by participants
and subject to the cut-off rates as decided by the Reserve Bank of India, at Mumbai.
The Repo/Reverse Repo rate in per cent per annum expected by the tenderer will
be expressed up to two decimal points rounded off to the nearest 5 basis points.
As there will be no adjustment for accrued coupon, the cash flow will depend upon
the Repo rate emerging on day-to-day basis. 5.
Mechanics of operations: i) The LAF auction timing
is being advanced by 30 minutes. Bids will be received in tender forms (Annexures
I and II)
at IDM Cell before 10.30 a.m., as against 11.00 a.m. at present. A separate
box for the purpose will be kept at the reception on the Ground floor of the Central
Office Building, RBI, Mumbai. Processing of the bids will be done at IDMC. The
auction results will be displayed by Mumbai Office by 12.00 noon as against
12.30 p.m. at present. ii) The Repo
will be conducted as 'Hold in Custody' type, wherein the Reserve Bank of India
will act as a custodian for the participants and hold the securities on their
behalf in the Repo/Reverse Repo Constituents’ Accounts. In pursuant to this, the
participants will have to give an undertaking as given in the respective tender
forms authorizing RBI to act on behalf of them. Reserve Bank of India shall not,
however be responsible for any loss, damage or liability on account of acting
as the Custodian on behalf of the participants. A Repo Constituents’ SGL Account
(RC SGL Account) and Reverse Repo Constituents’ SGL Account (RRC SGL Account)
will be opened and held in the Securities Department in Mumbai Office for this
purpose which will have institution-wise subsidiary records of the securities
sold under Repo and securities bought under Reverse Repo. RBI will have Subsidiary
Accounts in the case of both of these Accounts. iii)
On success in auction in respect of Repos, the tenderer’s RC SGL Account will
be credited with the required quantum of securities debiting Bank’s subsidiary
account/Investment Account. Likewise, the tenderer’s Current Account will be debited
for the resultant cash flows and credited to the Bank’s Account. The transaction
will be reversed in the second leg. iv)
In the case of Reverse Repos, on acceptance of bid, the tenderer's SGL account/
RRC SGL Account will be debited with the required quantum of securities and credited
to Bank’s Investment Account/Subsidiary RRC SGL Account. Accordingly, the tenderer’s
Current Account will be credited with the Reverse Repo amount, debiting the Bank's
account. The transactions will be reversed in the second leg. v)
Transactions between RBI and counter parties including operation of the RC SGL
Account and RRC SGL Account would not require separate SGL forms as provision
will be made in the application form for the purpose. Likewise, transfer of securities
from/to RBI’s Investment Account and Subsidiary Accounts in the Repo and Reverse
Repo SGL account will not require signing of SGL transfer forms. However, transfer
from tenderer’s SGL Account to the RRC SGL Account will require completion of
SGL form. In the case of Reverse Repos, tenderers will have the option to either
use the RRC SGL Account route or getting their SGL Accounts debited for the purpose
of transferring securities to RBI. vi)
Pricing of all securities including Treasury Bills will be at face value for Repo/Reverse
Repo operations by RBI. Accrued interest as on the date of transaction will be
ignored for the purpose of pricing of securities. Coupon, if any, will be transferred
to RBI in the case of Repos, and RBI will collect the coupon, if any, on the due
date and credit the same to the party’s Current Account in the case of Reverse
Repos. 6. Eligibility All
Scheduled Commercial Banks (excluding Regional Rural Banks) and Primary Dealers
(PDs) having Current Account and SGL Account with RBI, Mumbai will be eligible
to participate in the Repo and Reverse Repo auctions. 7.
Minimum bid size To enable participation
of small level operators in LAF and also to add further operational flexibility
to the scheme, the minimum bid size for LAF is being reduced from the existing
Rs.10 crore to Rs.5 crore and in multiples of Rs.5 crore thereafter. 8.
Eligible Securities Repos and
Reverse Repos will be undertaken in all transferable Government of India dated
Securities/Treasury Bills (except 14 days Treasury Bills). 9.
Margin Requirement A margin
will be uniformly applied in respect of the above collateral securities comprising
the Government of India dated securities/ Treasury bills. The amount of securities
offered or tendered on acceptance of a bid for Rs.100 will be Rs.105 in terms
of face value. 10. Settlement
of Transactions The settlement of transactions in the
auction will take place on the same day. 11.
SLR and Securities held in Repo SGL Account Securities
held by RBI on behalf of banks' Repo Constituents’ SGL account and credit balance
in the RRC SGL Account will be counted for SLR purpose and a certificate will
be issued to banks by RBI on a fortnightly basis. As far as valuation etc. for
SLR purpose is concerned, extant DBOD instructions will apply. 12.
Terms and Conditions Tender Forms
for 'Repo Auction' and 'Reverse Repo Auction' along with terms and conditions
are enclosed at Annexures I
and II. 13.
Information Dissemination For
a smooth transition to full-fledged operation of LAF, banks and PDs are being
provided a back-stop facility at variable rate of interest, as a cushion over
the normal liquidity facility at Bank Rate. Along with the auction results, the
rate of interest applicable for the back-stop facility for the concerned day will
also be announced for the benefit of the participants who wish to avail of such
facility. Further, to facilitate better bidding by the participants, additional
information on the aggregate cash balances of scheduled commercial banks maintained
with RBI, during the fortnight, on a cumulative basis with a lag of two days as
also weighted average cut-off yield will also be released as a part of the Press
Release on money market operations. |