RBI revises liquidity framework to manage market volatility

Written by fe Bureau | Mumbai | Updated: Aug 23 2014, 07:52am hrs
The Reserve Bank of India (RBI) on Friday revised its liquidity management framework in order to manage volatility better and to ensure more flexibility in borrowing.

From September 5, RBI will conduct variable rate 14-day term repo auctions up to an aggregate of 0.75% of the net demand and time liabilities (NDTL) of the banking system. The auctions will be conducted four times a fortnight every Tuesday and Friday, between 11am and 11.30am, for an amount equivalent to one-fourth of 0.75% of NDTL in each auction.

That apart, the central bank said it will conduct overnight variable rate repo auction daily between 3-3.30 pm. The auction amount will be decided by RBI, based on an assessment of the liquidity conditions as well as government cash balances available for auction for the day, and will be announced around 2.30 pm.

However, bond markets barely moved on the measures, with the 10-year benchmark 2024 bond and the overnight cash rates broadly steady from levels before the announcement.

In addition to the framework, the Reserve Bank of India may announce special variable rate short-term repo/reverse repo auctions at short notice to take care of fast-changing liquidity conditions at any time during the day, the central bank said in a statement. Last month, RBI had said in its third bi-monthly monetary policy that it will review existing liquidity arrangements and continue to monitor and manage liquidity to ensure adequate flow of credit to the productive sectors.

RBI governor Raghuram Rajan had also said liquidity framework was being reworked to manage transient liquidity pressures arising from tax outflows and sluggish spending by the government.

In the months of June and July, RBI had injected R94,000 crore through nine special-term repos. Despite the reduction in export credit refinance in June, the average utilisation of the repo facility has only been around 70% of the available limit.


* From Sept 5, RBI to conduct variable rate 14-day term repo auctions up to an aggregate of 0.75% of NDTL of banking system

* Auctions to be conducted four times a fortnight, every Tuesday and Friday between 11am and 11.30am, for an amount equal to one-fourth of 0.75% of NDTL