The RBI said the lending in the call money market, on a daily basis, should not exceed 25 per cent of their owned funds (paid-up capital plus reserves) as at the end of March of the last fiscal.
Salient Features Of Monetary And Credit Policy For The Year 2002-03
Growth rate in 2002-03 projected at 6.0 to 6.5 per cent. Inflation to remain low
The RBI also said that borrowings by scheduled commercial banks in the call money market, on a daily basis should not exceed 100 per cent of their owned funds or two per cent of aggregate deposits as at the end of March of the previous financial year, whichever is higher.
In order to ensure that scheduled commercial banks do not face any disruption in their asset-liability mismatch in adjusting to this stipulation, the existing borrowers and lenders should unwind their positions in excess of the prudential limits by the end of August 2002.
The cap on call is a move by the central bank towards restricting the extent of borrowing in the call money market. At present most market players fund their investment via the call money market and the RBI wants them to limit that, said IndusInd Banks senior vice president, head treasury, Sharukh Wadia.
Said IDBI Banks country head-treasury, Janak Desai: The rationalisation in the level of permitted call borrowings will also significantly reduce the irrational exuberance that the government securities (G-Secs) market has been witness to. Trimming of the large surplus positions on G-Secs securities in the banking system will result in the bond markets remaining subdued for some time to come until structural corrections required in the system are largely addressed.
Said Credence Analytics director Shefali Sachdev: The policy shows that RBI is concerned about the market risk regarding the banks holding of G-Secs securities. RBI is also concerned about the low yield of G-Secs. The credit policy gives a clear-cut signal to banks that they should have some kind of cushion on G-Secs investments.
RBI restricts bank and non-bank players from accessing the call market for their borrowing requirements. This will help them to sort out asset-liability mismatches.
A rough estimate shows that the borrowing from the call market will shrink by Rs 7,000 crore on a daily basis. Currently, dependence on call borrowing is around Rs 20,000-25,000 crore.
The restrictions have been placed on the call money market borrowings and lendings are positive measure for money market and should reduce volatility in the interest rates, said ICICI Banks senior vice president & chief dealer domestic treasury, Narendra Gupta.