Letters: Repo - No questions asked

Apropos the report “Banks eye high arbitrage profits” (February 20), the basic question is the objective of the Liquidity Adjustment Facility (LAF) at the Reserve Bank of India (RBI). If one understands it well, LAF is to even out deficits and surpluses in liquidity in the banking system, arising out of day-to-day operations. Any short-term access by banks of RBI, the lender of last resort, should be after they have exhausted all possibilities in the inter-bank market. But the central bank follows the Biblical dictum: “Ask and it will be given to you; seek and you will find; knock and the door will be opened to you” (Matthew 7:7). Of course, it follows the international practice of not investigating the use of repos, as revealed by my enquiries with the central banks in Japan and the UK and the European Central Bank. Besides, I believe using the repo funds for normal business operations against which an advisory was issued by RBI a few years ago, banks are deploying the money in the forex market and taking advantage of intra-day variations. It is indeed odd that instead of banks in deficit, it is those with surplus resources that access the repo window. It is not surprising that they are asking for the revival of the 14-day repos. The availability of repos perhaps is a disincentive for banks with surplus statutory liquidity ratio securities to engage in deposit mobilisation. Irrespective of the international practice, the apex bank should follow up the utilisation of funds that are rolled over from day-to-day operations, making them short-term refinance.

A Seshan Mumbai

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