RBI discontinues SLAF, banks start parking funds

Written by fe Bureau | Mumbai | Updated: Aug 1 2010, 05:07am hrs
The liquidity crunch in the system persisting from the last two months finally seem to have eased. Banks have started parking funds with the Reserve Bank of Indias (RBI) reverse repo window at 4.50%.

On Friday, the banks have parked a net of Rs 1,775 crore with the RBI. The central bank on Friday decided to discontinue the special liquidity adjustment facility (SLAF) facility in terms of second liquidity adjustment facility(LAF) .While the second liquidity adjustment facility (SLAF) conducted on a daily basis since May 28, 2010 expires on July 30, 2010, it will continue to be held on reporting Fridays, RBI said in a press release.

Post the RBI policy announced on Wednesday, banks have borrowed just Rs 2,255 crore from the repo window at 5.75% while parking Rs 5,775 crore with the central banks reverse repo window.

The liquidity in the system has moved into positive territory after being negative for about a couple of months. This was evident with banks parking Rs 6,675 crore at the RBIs reverse repo on Thursday. We expect liquidity to remain balanced now. It will neither be too much in surplus nor will it be too much in deficit. says Joydeep Sen, SVP, head of fixed income, advisory at BNP Paribas India Wealth Management. He said as the liquidity scenario had improved, the shorter maturity yields on money market instruments like CPs, CDs and corporate bonds would ease. In the monetary policy review on 27 Julyin a bid to combat high inflationRBI hiked the reverse repo and the repo rate by a good 50 and 25 bps respectively. As a result, the yield on the 10-year benchmark paper went up by five basis points on Tuesday.

With liquidity somewhat in short supply, the RBI had, towards the end of May, allowed banks to maintain a lower statutory liquidity ratio of 0.50% and also to raise funds from it through a second liquidity adjustment facility window till July 2. This facility was extended to July 16, 2010 and again to July 30, 2010. The apex bank started conducting two LAFs every day, allowing banks to access funds from it. It also cut down the size of treasury bill auctions and bonds. In all, close to Rs 1,00,000 crore had moved out of the banking system, on account of payments for telecom licenses and advance taxes.