Oil bonds seep into liquidity operations

The Reserve Bank of India (RBI) late on Friday said oil bonds can also be considered as security for liquidity operations.

The move comes as RBI’s bond holding may not be adequate to pledge against the fund parked by banks. Banks on Friday parked Rs 4.98 lakh crore of their surplus money with RBI. In addition, RBI has to pledge government securities against the government cash balances with it, estimated to be at least Rs 1 lakh crore. 

However, as on June 2016 the central bank had only Rs 7 lakh crore of central government bonds in its books that can be pledged against the money deposited. It is in this context the central bank has expanded the ambit of eligible securities.

RBI gives overnight liquidity to banks at repo rate of 6.25 per cent and absorbs money at the reverse repo rate of 5.75 per cent. “It has been decided that the oil bonds issued by the Government of India will qualify as eligible securities for repos, reverse repos and marginal standing facility (MSF),” RBI said in a late evening notification on its website. 

Oil bonds are inferior to government securities. These are non-SLR (statutory liquidity ratio) grade, which means banks cannot use the bonds to calculate their mandatory bond holding requirement, now at 20.75 per cent of the deposit base. The oil bonds would continue to remain non-SLR grade, RBI said.

The central bank also said when it would pledge securities, it would be at par value. But when banks pledge these securities, they will have to keep a margin of four per cent. This means, when banks park their excess money with RBI, the central bank will give Rs 100 worth of bonds for every Rs 100 parked. But when it is accepting the same bonds for lending to banks, it would accept Rs 104 worth of bonds for every Rs 100 given.

The revised rules will be applicable from Monday, RBI said.

Soumyajit Niyogi, associate director, credit & market research group at India Ratings, said: “RBI has started exploring alternative options by allowing oil bonds in the liquidity window and by removing margin requirement in the reverse repo window. This will create additional room for RBI to continue reverse repo as the most preferred tool for sterilisation in the current condition.”