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monetary policy that allows banks to borrow money through repurchase agreements. Thid doc talks about used in monetary policy that allows banks to borrow money through repurchase agreements. This doc talka about Eligibility, Minimum bid Size, Rate of Interest, Discretion to RBI, Tenor
Short note on LAF (Liquidity adjustment facility) LIQUIDITY ADJUSTMENT FACILITY A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets. Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control. Various banks will use eligible securities as collateral through a repo agreement and will use the funds to alleviate their short-term requirements, thus remaining stable. Liquidity Adjustment Facility (LAF) was introduced by RBI during June, 2000 in phases, to ensure smooth transition and keeping pace with technological upgradation. On recommendations of an RBI’s Internal Group RBI has revised the LAF scheme on March 25, 2004. Further revision has been carried wef Oct 29, 2004. The revised LAF scheme has the following features: Objective : The funds under LAF are used by the banks for their day-to-day mismatches in liquidity. Tenor :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions (for injection of liquidity) are conducted on a daily basis (except Saturdays). 7-days and 14-days Repo operations have been discontinued wef Nov 01, 2004. Eligibility : All commercial banks (except RRBs) and PDs having current account and SGL account with RBI. Minimum bid Size : Rs. 5 cr and in multiple of Rs.5 cr Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated securities and treasury bills. Rate of Interest : The reverse repo rate will be fixed by RBI from time to time (presently 5.25%). The repo rate (presently 6.25% wef Oct 26, 2005) will continue to be linked to the reverse repo rate and the spread between the repo rate and the reverse repo rate which was reduced to 150 basis points with effect from March 29, 2004 has been reduced further to 100 basis points. Discretion to RBI : Under the revised Scheme, RBI will continue to have the discretion to conduct overnight reverse repo or longer term reverse repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. RBI will also have the discretion to change the spread between the repo rate and the reverse repo rate as and when appropriate. (As per an IMF 1997 publication, “the sale and repurchase transactions (reverse repo), are sales of assets by the central bank under a contract providing for their repurchase at a specified price on a given future date; they are used to absorb liquidity”. On the contrary, prior to above change, in the Indian context, “repo” denotes liquidity absorption by the Reserve Bank and “reverse repo” denotes liquidity injection).
doc_908841091.doc
monetary policy that allows banks to borrow money through repurchase agreements. Thid doc talks about used in monetary policy that allows banks to borrow money through repurchase agreements. This doc talka about Eligibility, Minimum bid Size, Rate of Interest, Discretion to RBI, Tenor
Short note on LAF (Liquidity adjustment facility) LIQUIDITY ADJUSTMENT FACILITY A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets. Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control. Various banks will use eligible securities as collateral through a repo agreement and will use the funds to alleviate their short-term requirements, thus remaining stable. Liquidity Adjustment Facility (LAF) was introduced by RBI during June, 2000 in phases, to ensure smooth transition and keeping pace with technological upgradation. On recommendations of an RBI’s Internal Group RBI has revised the LAF scheme on March 25, 2004. Further revision has been carried wef Oct 29, 2004. The revised LAF scheme has the following features: Objective : The funds under LAF are used by the banks for their day-to-day mismatches in liquidity. Tenor :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions (for injection of liquidity) are conducted on a daily basis (except Saturdays). 7-days and 14-days Repo operations have been discontinued wef Nov 01, 2004. Eligibility : All commercial banks (except RRBs) and PDs having current account and SGL account with RBI. Minimum bid Size : Rs. 5 cr and in multiple of Rs.5 cr Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated securities and treasury bills. Rate of Interest : The reverse repo rate will be fixed by RBI from time to time (presently 5.25%). The repo rate (presently 6.25% wef Oct 26, 2005) will continue to be linked to the reverse repo rate and the spread between the repo rate and the reverse repo rate which was reduced to 150 basis points with effect from March 29, 2004 has been reduced further to 100 basis points. Discretion to RBI : Under the revised Scheme, RBI will continue to have the discretion to conduct overnight reverse repo or longer term reverse repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. RBI will also have the discretion to change the spread between the repo rate and the reverse repo rate as and when appropriate. (As per an IMF 1997 publication, “the sale and repurchase transactions (reverse repo), are sales of assets by the central bank under a contract providing for their repurchase at a specified price on a given future date; they are used to absorb liquidity”. On the contrary, prior to above change, in the Indian context, “repo” denotes liquidity absorption by the Reserve Bank and “reverse repo” denotes liquidity injection).
doc_908841091.doc