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To provide the banking system with relatively longer term funds at market rates, the Reserve Bank of India has decided to conduct a special 28-day term repo auction for ₹20,000 crore on Friday.
In the Second Bi-Monthly Monetary Policy Statement for 2014-15, which was released on Tuesday, the central bank said it will introduce a special term repo facility amounting to 0.25 per cent of the banking system’s total deposits to compensate fully for the reduction in access to liquidity under the Export Credit Refinance (ECR) facility.
According to the RBI, the special term repo should improve access to liquidity from it for the system as a whole without the procedural formalities relating to documentary evidence, authorisation and verification associated with the ECR.
“This should also improve the transmission of policy impulses across the interest rate spectrum and engender efficiency in cash/treasury management,” the RBI said.
The RBI has reduced the liquidity provided under the ECR facility from 50 per cent of eligible export credit outstanding to 32 per cent. With this, the quantum of cheap funds available for arbitrage when liquidity is tight has been reduced. The refinance is aimed at encouraging banks to provide finance to exporters.
The ECR is repayable on demand or on the expiry of fixed periods not exceeding 180 days. It is available at the repo rate.
The reversal of the 28-day term repo will take place on July 4, 2014.
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