RBI likely to stop overdraft under LAF

RUN-UP TO THE MONETARY POLICY

As part of its liquidity tightening measures, the Reserve Bank of India (RBI) may discontinue overdraft facility offered to banks and primary dealers while dealing under the liquidity adjustment facility (LAF).

According to market sources, banks and primary dealers pledge government securities and borrow funds from the RBI under the repo route. However, they are allowed to take back the securities the next day itself without depositing any fund. The money is given back during the day whenever the banks are able to arrange the money.

The central bank has observed that many banks are leveraging (using the funds for lending long-term credit) and rolling over the positions on a daily basis. But these funds are meant to be only used for meeting the day-to-day liquidity requirements.

Secondly, in an effort to curtail the flow of short-term debt capital through the participatory note (PN) route, the bank is likely to suggest to the capital market regulator Securities and Exchange Board of India (Sebi) to furnish the identity and source of funds for reporting requirements with the central bank.

It has been observed that the flow through the PN route is much in excess of the fund flow though foreign institutional investors.

These are some of the measures being contemplated by the RBI to check money supply and its impact on inflation on the economy. Fears of inflation have been revived with rising oil prices in the international market and higher commodity prices in the domestic markets.

Prudential requirement for commercial real estate loans may be further tightened through a hike in risk weight or higher provisioning requirements. The RBI is also reviewing the sectors under commercial real estate and possibly may take out hotels and hospitals.

These sectors will be clubbed under infrastructure and will not form part of the commercial real estate.

Further, the Foreign Exchange Management Act (FEMA) may be tightened to restrict non-resident Indians' exposure to real estate market in the country. This is in addition to a likely lowering of interest rates on NRI deposits to negative so as to disincentivise such deposits. NRI deposit rates are pegged to Libor - the international benchmark.

It has been collated by the RBI that 70-80 per cent of the exposure of banks to the real estate sector is mainly towards commercial real estate.