Letters: RBI's misplaced concern

This refers to the report “RBI slams banks for LAF misuse” by Manojit Saha (March 21). It is surprising to read that the Reserve Bank of India (RBI) has now expressed displeasure at the fact that some banks are borrowing under the Liquidity Adjustment Facility (LAF), on-lending the funds to other banks and earning a spread as a result. LAF, as has been rightly observed, is a secured facility available to banks for borrowing against surplus government securities in their portfolio and is not unsecured call money. Since there may be banks with inadequate surplus government securities to pledge with RBI and borrow directly, there was nothing sinister in surplus banks lending to them from LAF-borrowed funds. This way liquidity is managed in the system without much volatility in the call rates. This has been discussed with senior RBI officials in the past and the bank’s treasury officials have been clearly given to understand that it was perfectly in order for banks to lend to other entities from LAF-borrowed funds. RBI should not keep changing its stand, since it may aggravate volatility in the overnight money market.

S Ravindranath, Coimbatore