The Hindu Business Line : RBI to scrap one-day repo

THE Reserve Bank of India has revised the liquidity adjustment facility (LAF) to do away with the one-day repo and substitute it with 7-day ones. Currently, through the LAF window, the RBI conducts repo deals to suck out liquidity and reverses repo deals to inject liquidity into the financial system on a daily basis.

Seven-day repos would mean that the banks and bond houses would have to plan their cash management better. This instrument would help curb liquidity in the system more effectively, said market players.

The new scheme to start on March 29 will involve (i) 7-day fixed rate repo conducted daily and (ii) overnight fixed rate reverse repo conducted daily, on weekdays.

However, in order to achieve smooth transition to the revised scheme, the existing overnight variable rate repo auction facility would also be available till April 2, said the RBI in a notification.

Subsequently, the overnight repo auction will be discontinued and only the 7-day repo auction will be available.

Further, in order to enable market participants to meet their prior commitments based on their existing operations, the 14-day repo, conducted on a fortnightly interval would also continue. The 14-day repo will, however, be phased out in due course.

The 7-day repo rate will be at 4.50 per cent per annum, the current overnight rate. The gap between the repo rate and the reverse repo rate will be reduced to 1.50 per cent from the current 2.00 per cent with effect from March 29. The reverse repo rate from that date will be 6.00 per cent per annum.

In future, as and when the Reserve Bank changes the repo rate, the reverse repo rate will normally change to 1.50 per cent over the repo rate.

Under the revised scheme, the Reserve Bank will continue to have the discretion to conduct overnight repo or longer term repo auctions at a fixed rate or at variable rates depending on market conditions and other relevant factors.

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