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RBI lifts minimum period restriction on ready-forward deals

The Reserve Bank of India, in the monetary and credit policy announced today, has removed the restriction on the minimum period on ready-forward transactions from tomorrow.

The apex bank had, in 1995, placed a restriction of a minimum period of three days for repo transactions. According to the RBI, the decision was taken in the backdrop of inter-bank liabilities being exempted from the maintenance of cash reserve ratio beyond a statutory minimum requirement of three per cent, and to enable banks and other participants in the repo market adjust their liquidity more flexibly.

Reacting to the decision, dealers in the call money market said the decision was unlikely to have any major impact on the overnight money market and that the repo rate would continue to act as a floor.

The RBI has also granted an 'in-principle' acceptance of launching interest rate swaps as a first step towards launching derivative instruments in the money markets. Those eligible to utilise this product will include call/notice money market participants.

''RBI will examine, in consultation with the market participants, relevant aspects such as standard documentation, the back-up by underlying transactions between parties, benchmark rate and maturity and prudential prescriptions before allowing the product in the market,'' the credit policy statement said.

The RBI agreed with the recommendation in the second report of the Narasimham Committee restricting the call/notice market to banks and primary dealers. The RBI would implement the committee's suggestion of moving towards a 'pure' interbank call/notice/term money market.

''This will be implemented in a manner that the existing lenders in the market will have operational flexibility to adjust their asset-liability structure. Simultaneously, measures will be taken to widen the repo market and improve non-bank participation in a variety of other instruments,'' the policy notes.

The RBI said it could not introduce a liquidity adjustment facility scheme in the form of repo immediately since there are still procedural and technological constraints in settlement and transfer of securities.

It has however been decided to replace the present general refinance facility, while the export credit refinance will continue as a separate scheme and reviewed independently. Besides, collateralised intra-day/overnight transfer facility with adequate margin is also being considered as a way to facilitate smooth operation of payment and settlement system. These are to be eventually placed on real time gross settlements basis.

RBI has deferred the proposal to introduce one-day repos/reverse repos for liquidity adjustment, since fixed rate repos have helped absorb the excess liquidity in the monetary system.

A few announcements, like the introduction of 28-day treasury bills and the reintroduction of 182-day T-bills, had to be put on hold since there was little investor interest in them.

UNI

The RBI's Credit and Monetary Policy 1998-99