Central bank to conduct only one LAF operation

With abundant cash in the system, the Reserve Bank of India (RBI) has decided to dispense with two daily liquidity adjustment facility (LAF) operations. Instead, starting tomorrow, there will be only one LAF operation in the morning, the central bank said in a statement. The second LAF will be conducted only on reporting Fridays between 4.00 pm and 4.30 pm.

It also said that other coditions for LAF operations will remain unchanged.

After the credit crisis intensified following the collapse of Lehman Brothers on September 16 last year, RBI had announced that a second LAF operation would be conducted on a daily basis to deal with the tight liquidity conditions and also to provide comfort to the market.

Following a host of monetary easing measures announced by RBI since October and the lower demand for credit, liquidity conditions have eased considerably and, for nearly six weeks, banks have been consistently parking over Rs 1,00,000 crore on a daily basis with the central bank through the reverse repo window. Call rates have also stabilised at around 3.25 per cent, as against the spike of over 20 per cent seen in September.

On Tuesday, banks parked Rs 1,52,175 crore with the central bank through the two LAF operations, as against Rs 1,44,911 crore yesterday. Given the abundant liquidity, the weighted average call rate was 3.18 per cent, compared with 3.22 per cent yesterday, according to data on the Clearing Corporation of India website.

On Tuesday, call rates hovered between 1.75 per cent and 3.30 per cent. In the collateralised borrowing and lending operations (CBLOs) segment, which is tapped by primary dealers and mutual funds among others, the weighted average rate was 1.63 per cent, as against 2.71 per cent yesterday.

Bond yields drop
Ten-year bonds gained for the first time in four days on speculation that investors were putting spare cash into debt, attracted by yields near a two-week high.

Yields on the 6.05 per cent note due February 2019 fell eight basis points to 6.30 per cent at close, according to the central bank’s trading system. The price rose 0.53, or 53 paise per Rs 100 face amount, to 98.20.

India has offered to sell on May 8 Rs 6,000 crore of the 6.05 per cent notes due in 2019 and Rs 3,000 crore each of the 8.27 per cent bonds maturing in 2027 and 6.83 per cent securities due in 2039.