New LAF Norms From March 29

Mumbai, March 25 | Updated: Mar 26 2004, 05:30am hrs
The Reserve Bank of India (RBI) on Thursday notified that the revised liquidity adjustment facility (LAF) would come into force from March 29, 2004.

The revised scheme will be operationalised through seven-day fixed rate repo conducted daily and overnight fixed rate reverse repo conducted daily on weekdays. The effort is to mop up the excess funds from the inter-bank system.

The repo rate will be fixed by the RBI. However, the RBI has retained the rate for the 7-day repo at 4.50 per cent per annum. The reverse repo rate will continue to be linked to the repo rate. However, the spread between the repo rate and the reverse repo rate will be reduced by 50 basis points from 200 basis points to 150 basis points with effect from March 29, 2004.

Accordingly, the reverse repo rate from that date will be six per cent per annum. In future, as and when RBI changes the repo rate, the reverse repo rate will normally change to 150 basis points over the repo rate.

In order to achieve smooth transition to the revised scheme, the existing overnight variable rate repo auction facility with the existing features would also be available to eligible market participants up to April 2, 2004, the central bank said.

Subsequently, the overnight repo auction will be discontinued and only the 7-day repo auction will be available. Further, in order to enable market participants to meet their prior commitments based on their existing operations, the 14-day repo, conducted on a fortnightly interval, would also continue with the existing features. The 14-day repo will, however, be phased out in due course.

Under the revised scheme, the RBI will continue to have the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. The central bank will also enjoy the discretion to change the spread between the repo rate and the reverse repo rate as and when appropriate.