Liquidity Support Facilities
1. The standing liquidity support facilities available to banks from Reserve bank of India were split into two parts, viz., (1) normal facility, and (2) back stop facility. Accordingly, the total quantum of support available to banks in CLF and export credit refinance and quantum of support available to PDS were split into these two components. Normal facility initially constituted about 2/3rds and back stop facility about 1/3rd. PD wise bank wise limits were fixed separately.
2. The normal facility was provided at the Bank rate.
3. The back stop facility was provided at a variable daily rate, which was linked to cut off rates emerging in regular LAF auctions and in the absence of such rates to NSE – Mumbai Inter-Bank offer rate (NSE– MIBOR) as follows:
i) The variable rate for the back stop facility to be fixed on a daily basis was 1% point over the reverse repo cut off rate at which funds were injected earlier during the day under LAF repo auctions.
ii) If no reverse repo bid was accepted as part of LAF auction, the rate was 2 to 3 percentage points over the repo cut off rate of the day emerged in LAF auction, as may be decided by Reserve Bank of India.
iii) In the absence of both i) and ii) above, the rate was 2 to 3 percentage points over NSE–MIBOR as decided by Reverse Bank of India.
Export Credit Refinance:
Export credit refinance facility has been rationalized. With effect from May 5, 2001 scheduled commercial banks are provided export credit to the extent of 15% of the outstanding export credit eligible for refinance as at the end of second preceding fortnight. Further, the existing refinance limit as on May 4, 2001 as per the current formula constituted the minimum limit available for banks up to March 31, 2002.
Changes in LAF Operating Procedure:
i) The minimum bid size for LAF has been reduced from the existing Rs 10 crore to Rs 5 crore to enable small operators to participate.
ii) The LAF timing has been advanced by 30 minutes – 10:30 am for receipts of bids and 12 noon for announcement of result.
iii) The market would be provided with information on the scheduled commercial banks’ aggregate cash balances maintained with Reserve bank on a cumulative basis during the fortnight with a lag of 2 days.
iv) Reserve bank of India will have an additional option to switch over to fixed rate repos on overnight basis. The rate of interest intended to be offered would be announced on the previous evening or before 10 am on the day of auction, if necessary.
v) In addition to overnight repos Reserve Bank will also have the discretion to introduce longer term repos up to 14 days as and when required.
vi) It was decided to introduce multiple price auction(in place of existing uniform price auction) on an experimental basis for one month during May 2001. Under the multiple price auction bidders get differential rates in accordance to their need and assessment of cost. Thus greater commitment to bidding is likely to be ensured. Intensity of demand in the market is clearly reflected in the bidding pattern.
The medium term objective of Reserve bank is to move over gradually to liquidity adjustment through LAF combined with backstop facility at variable rates and to do away with the various specific liquidity facilities available at bank rate.
Banks and Primary Dealers were eligible for collateralized liquidity support from Reserve Bank subject to certain limits which were split into ‘normal facility’ and ‘back stop’ facility. In October 2002, the apportionment between these two facilities was changed from 2/3rd and 1/3rd to one half each.
As the utilization of these facilities by banks and Primary Dealers had been negligible, the Reserve Bank changed the ratio of these facilities to 33:67 from December 27, 2003.