Liquidity infusion sought against nostro dollar kitty

Fund infusion similar to buy-sell swaps, treasury dealers tell RBI.

Banks' treasury dealers have urged the Reserve Bank of India (RBI) to consider providing liquidity support to the banking system against dollar balances in nostro accounts at reverse repo rate of 5.5 per cent. Indian banks hold about $7.4 billion in nostro accounts.

Nostro is an account a bank holds with a bank in a foreign country in the currency of that country for easy cash management. Nostro is derived from latin term "ours".

This was one of the slew of structural measures suggested for improving liquidity in money and foreign exchange markets when dealers had a meeting with the RBI governor earlier this week.

The meeting was held under the auspices of Fixed Income Money Market Dealers Association (FIMMDA), Foreign Exchange Dealers Association of India (FEDAI) and Primary Dealers Association of India (PDAI) as part of the central bank's pre-annual monetary policy consultations.

FIMMDA officials told the governor that liquidity infusion against nostro balances would be similar to RBI doing buy-sell swaps in the foreign exchange market but operating it under a liquidity adjustment facility (LAF). The operation could assure the market of liquidity support.

The three market associations also suggested that the limit of export refinance could be increased to enable banks to borrow more under this facility.

They also felt that the Clearing Corporation of India (CCIL) should allow corporate bonds to be used for collateralised lending and borrowing obligation (CLBO).

To improve liquidity in the government securities market, the associations said RBI could execute an active consolidation of government securities to create large sized benchmark issues around 5, 10, 15 and 30 year maturities.

At present, every maturity bucket has a number of government securities which are illiquid.

The dealers also argued in favour making CCIL as the nodal agency for clearing and settlement of corporate bonds, in a similar way as the government securities to improve liquidity in the corporate bond market.

They felt the introduction of screen-based trading would also improve transparency in the market.