It
may be recalled that in the Third
Quarter Review of Annual Statement on Monetary Policy for the Year 2006-07,
the Reserve Bank had stated that, 'over the remaining part of the year, management
of liquidity would receive priority in the policy hierarchy' (Paragraph 89). It
was also stated that, 'the Reserve Bank retains the option to conduct overnight
repo or longer term repo under LAF depending on market conditions and other relevant
factors. The Reserve Bank will continue to use this flexibility including the
right to accept or reject tender(s) under the LAF, wholly or partially, if deemed
fit, so as to make efficient use of LAF in daily liquidity management' (paragraph
95). Existing
Arrangements The
Reserve Bank has been currently conducting liquidity management largely through
the Liquidity Adjustment Facility (LAF), which is intended as a window for adjusting
day-to-day liquidity mismatches, and the Market Stabilisation Scheme (MSS), which
is used for addressing large swings in liquidity conditions which could have a
more durable character. Under
the existing MSS programme being conducted in accordance with the annual ceiling
for 2006-07 fixed at Rs.70,000 crore, the issuance of Treasury bills under MSS
has been undertaken through regular weekly auctions with an MSS portion of 91-day
Treasury Bills of Rs.1,500 crore and those for the fortnightly 182-day and 364-day
Treasury bills of Rs.1,000 crore each. While announcing the resumption of MSS
T-bills programme as above, it was stated that the Reserve Bank would retain the
flexibility of reviewing the auctions under the MSS from time to time, in response
to evolving circumstances. Under the existing MSS programme, an amount of Rs.16,457
crore has been sterilised in the current financial year so far, of which Rs.14,341
crore has been in the first half of 2006-07. The outstandings under MSS as of
today is Rs.45,457 crore. The
LAF has switched to a significant surplus mode with substantial net absorptions
being made in recent days. Under the existing arrangements, the LAF absorbs any
excess liquidity offered by scheduled commercial banks (excluding RRBs) and primary
dealers at a fixed rate. However, the Reserve Bank has always maintained that
banks should use the LAF window for equilibrating very short term mismatches over
temporary periods. MSS
– Modified Arrangements On
a review of the liquidity conditions, it has been decided that the MSS will now
use a mix of Treasury bills and dated securities in a more flexible manner keeping
in view the capital flows in the recent period, the assessment of volatility and
durability of capital flows, and the paramount importance attached to liquidity
management in containing inflation. The Reserve Bank would, subject to variations
in liquidity, announce every Friday the possibility and the quantum of MSS issuances
for the succeeding week. These announcements would cover issuances of Treasury
Bills and dated securities under MSS. Their auctions would be conducted in accordance
with provisions of Memorandum of Understanding between the Reserve Bank of India
and the Government of India dated March 25, 2004 under which Reserve Bank and
the Government of India agree on an annual ceiling and the Reserve Bank decides
the amount, tenor, modalities and the timing of issue. In
line with the above decisions, the auction schedule for the MSS for the next week
would be as follows: Schedule
for Issuance of T-Bills/dated securities under MSSfor
week ending March 9, 2007
Auction
Date | Nature
of Instrument | Auction
Amount | March
6, 2007 | 6.65%GS
2009 | Rs.
6,000 crore | March
7, 2007 | (i)
91-Day Treasury Bill | Rs.
1,500 crore | (ii)
182-Day Treasury Bill | Rs.
1,000 crore |
The
auction for Treasury bills under MSS would continue to take place by notifying
the amounts under MSS every week along with the regular auction calendar as has
been the existing practice. The Reserve Bank would retain the flexibility of reviewing
the schedule of auctions under the MSS from time to time, in response to evolving
circumstances. LAF
– Modified Arrangements On
a review of the liquidity conditions, it has been decided that in view of the
enhanced MSS programme being put in place and the need to restore LAF as a facility
for equilibrating very short-term mismatches, the Reserve Bank would modulate
the liquidity it absorbs through the daily reverse repo auctions. Accordingly,
starting March 5, 2007 (Monday), daily reverse repo absorptions would be limited
to a maximum of Rs.3,000 crore each day comprising Rs.2,000 crore in the First
LAF and Rs. 1,000 crore in the Second LAF. In case of partial rejection of bids,
allocations would normally be made proportionately on a pro-rata basis.
While bidding in LAF auctions, scheduled commercial banks (excluding RRBs) and
primary dealers should ensure that clear funds are available with them to cover
the bid at the time of its submission. The
above modified arrangements for LAF and MSS being put in place are expected to
facilitate the maintenance of appropriate liquidity in the system and to respond
more swiftly to the evolving liquidity situation in line with the objectives and
stance of the monetary policy. Alpana
Killawala Chief General Manager Press
Release : 2006-2007/1188 |