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UTI, LIC, IDBI, MFs, FIs allowed to borrow through repos

The Reserve Bank of India has decided to implement recommendations of the Narasimham Committee in a phased manner for the improvement the transaction mechanism in money markets and debt markets.

The RBI has stated in its slack season Credit Policy that in the light of the Narasimham Committee recommendations, it has been decided to develop the repo market with appropriate regulatory safaguards, such as, delivery versus payment, uniform accounting, valuation and disclosure norms and restricting repos to instruments held in demat form with a depository.

These prudential safeguards have been designed to ensure transparency and accountability as also increasing at the same time liquidity and depth in the securities market.

Accordingly, the central bank has decided to allow UTI, LIC IDBI and other non-bank participants in the money market to access short-term liquidity through repos thereby facilitating their cash management and gradual move out of the call money market.

According to market sources, at present UTI, LIC, IDBI and other non-bank participants in money markets (such as some other FIs and mutual funds) are permitted to lend through reverse repos. Now these entities will also be permitted to borrow through repos.

The sources further said that it appears that corporates would continue to be outside the repo market. In addition, the RBI has clarified it would impose no restriction on the maximum period for repos.

The exact timeframe for phasing out non-bank participants from the call money market would be revived after six months and synchronised with the development of the repo market, the RBI said in its monetary policy and added that detailed guidelines for the repo market will be issued separately.

Among other highlights of the RBI's policy, the banks have been permitted to fix different prime rates for different maturities of loans by the RBI. Also, banks have been allowed to offer fixed rate loans. For advances against deposits, the existing ceiling of PLR has been withdrawn and banks are made free to fix appropriate rates.

According to ICICI Securities Limited this measure would severely restrict bank investment in Tier-II bonds, and hoped that some banks may need to access the market for Tier-I capital adequacy requirments.

The RBI also permitted money market mutual funds to offer cheque book facility to investors. The market experts said this would result in a shift from savings deposits (4.5 per cent interest rate) towards units of MMMFs. The central bank has stated that guidelines for interest rate swaps and forward rate agreements will be issued soon.

UNI

RBI Governor Bimal Jalan's policy statement

April 20, 1999: The RBI's Credit and Monetary Policy

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