RBI alters LAF timing to curb volatility in overnight rates

From August 16, the Reserve Bank of India (RBI) will hold reverse repo auctions between 4.30 and 5 pm on all working days, except Saturdays. The move will help curtail volatility in the overnight money market that emerged after the apex bank discontinued its second Liquidity Adjustment Facility (LAF) in May.

The timing for repo auctions remains the same. Presently, repo and reverse repo auctions under the LAF window are conducted between 9.30 am and 10.30 am. In accordance with recommendations made by the Deepak Mohanty panel on LAF operations, the repo and reverse repo window open only once in the day. Banks would then turn to the money market to deploy surplus funds or cover any borrowing needs, which used to result in unusual rise or fall in the rates in overnight call and the collateralised borrowing and lending obligations.

“We had requested RBI to conduct LAF auctions in the evening instead of the morning, as banks would have better understanding of their cash position by then,” said a senior treasury official of a large public sector bank. The new timing will allow banks to park the excess funds, if any, with RBI at a reverse repo rate of seven per cent. Deploying excess funds in call would result in rates falling below the LAF corridor.

The weighted average interbank call money rate is the operating target of RBI’s monetary policy. “Now the call rate will not trade above the repo rate in the morning and will not fall below the reverse repo rate in the evening,” said a bond dealer with a primary dealership. The repo rate is now eight per cent.

Also, the timings for Marginal Standing Facility (MSF) will be changed to 4.30-5 pm from 3.30-4.30 pm presently. Banks can approach the MSF window after exhausting all other sources. According to RBI, banks can borrow up to one per cent of their net demand and time liabilities at a penal rate if the Statutory Liquidity Ratio falls below the mandated 24 per cent.

The MSF rate is now nine per cent.