Ref. IDMC No 3968 /03.75.00/ 99-2000 May
29, 2000
Jyestha 8, 1922 To: All
Primary Dealers and Scheduled Commercial Banks (Excluding RRBs) Dear
Sirs, Sub: Liquidity Adjustment
Facility Enclosed is a Scheme
of the 'Liquidity Adjustment Facility' as announced in the Statement on Monetary
and Credit Policy for the year 2000-01 for implementation from June 5, 2000. Please
acknowledge receipt. Yours faithfully,
(Usha Thorat)
Chief General
Manager Scheme of Liquidity Adjustment Facility Pursuant
to the recommendations of the Narasimham Committee Report on Banking Reforms (Narasimham
Committee II), it was decided in principle, to introduce a Liquidity Adjustment
Facility (LAF) operated through repo and reverse repo. In April 1999, an Interim
Liquidity Adjustment Facility (LAF) was introduced to provide a ceiling and the
Fixed Rate Repos were continued to provide a floor for the money market rates.
Following the measures announced in the Statement on Monetary and Credit policy
for the year 2000-2001, it has been decided to implement the first stage of LAF
from June 5, 2000. The details of the Scheme 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. With the introduction of the Scheme, the existing Fixed Rate
Repo will be discontinued. So also the liquidity support extended to all scheduled
commercial banks (excluding RRBs) and Primary Dealers through Additional Collaterialised
Lending Facility (ACLF) and refinance/reverse repos under Level II, respectively
will be withdrawn. Export Refinance and Collateralised Lending Facility (CLF)
at Bank Rate will continue as per the existing procedures. Like-wise, Primary
Dealers will continue to avail of liquidity support at level I at Bank Rate. The
funds from the Facility are expected to be used by the banks for their day-to-day
mismatches in liquidity. The Scheme will be reviewed from time to time in consultation
with market participants and appropriate changes will be made in the light of
experience. 2. Rate of Interest: Interest
rates in respect of both repos and reverse repos will be decided through cut off
rates emerging from auctions on 'uniform price' basis conducted by the Reserve
Bank of India, at Mumbai. The 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. 3.
Mechanics of operations: i). Bids will be received
in tender forms (Annexure I
and II) at
IDM Cell before 11.00 a.m. on week days except Saturdays. A separate box for the
purpose will be kept at the reception on the Ground floor of the Central Office
Building. Processing of the bids will be done at IDMC. The auction results will
be displayed by Mumbai Office by 1.00 p.m. 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. Further, for
the purpose 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 held 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 crediting 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 crediting Bank’s Investment
Account/Subsidiary RRC SGL Account. Accordingly, the tenderer’s Current Account
will be credited with the 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 the RBI in the case of repos and RBI will collect the coupon if any on the
due dates and credit the same to the party’s Current Account in the case of reverse
repos. 4. 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. 5.
Limit: The minimum amount to be tendered under repos
and reverse repos will be Rs.10 crore and in multiples of Rs.5 crore. 6.
Eligible Securities: Repos and
reverse repos will be undertaken in all transferable dated Government of India
Securities/Treasury Bills (except 14 days treasury bills). 7.
Margin Requirement: The margins
will be uniformly applied in respect of the above collateral securities comprising
dated securities/ treasury bills and the amount of securities offered or tendered
on acceptance of a bid for Rs.100 will be Rs.105.00 in terms of face value. 8.
Settlement of Transactions: The settlement of transactions
in the auction will take place on the same day. 9.
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. 10.
Terms and Conditions: Tender
Forms for 'Repo Auction' and 'Reverse Repo Auction' along with terms and conditions
are enclosed at Annexure I
and II. |