• From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Wed, 24 Dec 2003 13:12:12 +0500

RBI yet to decide on SLR tag for stabilisation bonds 

MUMBAI: The Reserve Bank of India ’s deputy governor Rakesh Mohan has said that 
the market stabilisation bonds (MSBs) would be similar to government 
securities, though the RBI is yet to take a view on whether to accord SLR 
status to these bonds. 

The RBI’s liquidity adjustment facility (LAF) report speaks of floating MSBs as 
an alternative to issuing government bonds under open market operations (OMOs) 
for absorbing excess liquidity. 

The idea was mooted, since the RBI’s stock of G-secs is finite and central bank 
would like to look at other tools for managing liquidity. 

He was speaking at a money market seminar to discuss the LAF report with market 
participants. RBI’s executive director Usha Thorat has said that the call money 
rates would hover around the repo rate after the new LAF is in place. 

The RBI plans to have three tools of liquidity management under the new LAF.  
It has circulated the draft report of an internal group on LAF and instruments 
of sterilisation. 

Ms Thorat said that RBI would introduce MSBs out of a fund created for the 
purpose. The market stabilisation fund (MSF) would be of varying maturities, 
said Ms Thorat. 

The report  also wants to raise the  minimum tenor of the daily repos to seven 
days. Besides the repo and reverse repos, the LAF report plans to introduce a 
standing deposit facility at 100 basis points (bps) below the repo rate. 

This would provide participants, who are not able to park funds in repos, as an 
avenue of the last resort. The report also proposes a marginal lending facility 
for refinance at 150 bps over the repo rate. 

The MSF would be created out of the public account of the government. The cost 
burden for the government would be restricted to the interest payment for 
servicing these bonds. The new LAF is designed to meet the challenges posed by 
increased liquidity from forex inflows. 

The RBI has tried to contain the inflows through instruments such as OMOs, but 
is now realising that its stock of G-secs are of a limited quantity and cannot 
continue to arrest the rising liquidity. 

Later, replying to a media query on whether interest rates are showing signs of 
hardening, Mr Mohan said that we are seeing credit demand and this shows the 
growth of the economy. He said that the liquidity was huge as seen by repo bids 
between Rs 25,000 crore and Rs 30,000 crore daily. 

He said the liquidity needs to meet the rise in credit demand.  He said that 
the interest payable on MSBs would be the only portion, which would add to the 
government’s fiscal deficit

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