LAF change: 7-day fixed repo to replace one-day repo

The Reserve Bank of India (RBI) .introduced 7-day fixed-rate repos as part of its revised liquidity adjustment facility (LAF).

Henceforth, LAF will be a combination of the 7-day repo and the overnight reverse repo.

The revision forms part of recommendations made by the report of the internal group on liquidity adjustment facility on December 2, 2003.

Under the revised structure, besides lengthening the tenor of the repo, it has been decided to reduce the spread between repo and reverse repo rate by 50 basis points ( bp) from 200 bp to 150 bp.

While the rate for the 7- days repo will remain at 4.5 per cent, the reverse repo rate will be cut down from 6.5 per cent to 6 per cent per annum. In future, as and when the RBI changes the repo rate, the reverse repo rate will be 150 basis points over the repo rate.

The RBI press release said that the reduction of the reverse repo rate to 6.0 per cent with effect from March 29, 2004, would result in a reduction in the cost of funds for banks and PDs.

Further, in order to rationalise the existing structure of provision of liquidity facility from the RBI, it has been decided that the entire amount under standing liquidity facilities would be made available at a single rate.

Accordingly, it has been decided to merge the normal facility and back-stop facility into a single facility to be made available at a single rate of the reverse repo rate.

At present, standing liquidity facilities comprising export credit refinance (ECR) to scheduled banks and liquidity support to PDs are apportioned into a normal facility constituting one-third of the total entitlement available at the bank rate and back-stop facility constituting the remaining two-thirds available at the reverse repo rate.

Under the revised scheme, RBI will continue to have the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates and to change the spread between the repo rate and the reverse repo rate as and when appropriate.

Along with this, the bank rate, currently at 6.0 per cent, would continue to be announced independently.

IT has also been decided to adopt the international usage of the terms "repo" and "reverse repo", but from a future date.

Currently, the term repo is used by the RBI to absorb the liquidity in the system, whereas the term reverse repo is used for injection of liquidity which is the reverse of the international usage.