Special Fixed rate Repo under LAF receives lukewarm response

Mumbai, Oct 14 (UNI) A Special 15-day Fixed Rate Repo auction under Liquidity Adjustment Facility held today by the Reserve Bank of India received a lukewarm response as only four bids were received for a total amount of Rs 3,500 crore as against Rs 20,000 crore offer from the Apex bank.

RBI purchased the securities at a fixed rate of nine per cent.

RBI had announced the auction this morning to enable banks meet the liquidity requirements of Mutual Funds, on a suggestion from the Union government. The reversal shall take place on October 29, 2008.

This repo was in addition to the repo/reverse repo auctions conducted under Liquidity Adjustment Facility (LAF) and Second Liquidity Adjustment Facility (SLAF), which were held as usual.

The settlement for the special repo would be conducted separately and on gross basis RBI said.

In a statement in New Delhi Finance Minister P Chidambaram welcoming the RBI decision said last night, it was brought to the notice of Government that some mutual funds faced some stress in liquidity in meeting redemption requirements in respect of debt instruments and money market instruments. They sought a facility for accessing funds. Consequently, Government requested SEBI and RBI to meet today and address the issue. This morning, Chairman, SEBI met the Deputy Governors of RBI. Later, RBI heard key players in the mutual fund industry. Following these meetings, RBI has announced a special 15 day repo (to commercial banks) at 9 per cent for a sum of Rs.20,000 crore with a view to enabling the banks to meet the liquidity requirements of mutual funds.

In another significant decision to ease the liquidity crunch faced by the Mutual Funds, the Central Bank in a circular relaxed restrictions on lending and buying back of Certificate of Deposit issued by Banks and financial Institutions to Mutual Funds for a period of 15 days.

Under the Guidelines for Issue of Certificates of Deposits banks and FIs were not permitted to grant loans against CDs.

Furthermore, they were also not permitted to buy-back their own CDs before maturity.

While granting such loans to the mutual funds, the banks should keep in view the provisions of the SEBI (Mutual Funds) Regulations, 1996. Further, such finance, if extended to equity-oriented mutual funds, would form part of banks' capital market exposure, as hitherto, the circular said.

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