RBI to conduct frequent term repos for better liquidity management

The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai May 3, 2011. India's central bank raised interest rates by a sharper-than-expected 50 basis points on Tuesday and said fighting inflation is its priority, even at the expense of short-term growth. The rate rise was its ninth since March 2010, and exceeded market and economists' expectations for a 25 basis point rise, although the case for stronger action had been building since March headline inflation reached nearly 9 percent. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS)

The Reserve Bank of India, on Friday, said it would conduct more frequent term repo auctions to make borrowing more flexible to meet the liquidity needs.

“With a view to ensuring flexibility and transparency in liquidity management operations, a revised framework for liquidity management is being put in place with effect from September 5,” the RBI said in a statement.

On September 5, the RBI would conduct a 14-day term repo auction for an amount equivalent to one-fourth of 0.75 per cent of net demand and time liabilities (NDTL), it said.

There will be a 4-day term repo auction for an amount equivalent to three-fourths of 0.75 per cent of NDTL, it added.

There will be regular rollovers of maturing 14-day term repos on every Tuesday and Friday, it said.

However, the overall borrowing limit for banks has been retained for the liquidity adjustment facility (LAF).

Banks are at present allowed to borrow up to 0.25 per cent of NDTL from the LAF window.

Under the existing arrangements, day-to-day liquidity requirements are met through variable rate 14-day, 7-day repo auctions equivalent to 0.75 per cent of NDTL of the banking system.

Banks are also allowed to raise through overnight auction of repo at fixed rate, that is, the repo rate of 8 per cent. A bank is not allowed to borrow more than 0.25 per cent of its NDTL.