“Given that 2020 will be an extraordinary year with government loans popping up, we believe that the time has come to increase bond demand by using the necessary change in RBI law effectively, so reverse repo and term behavior reverse repo operations are completely non-collateral, ”it said.
The reverse repo is the lending of funds against the purchase of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price that includes interest on the borrowed funds. During reverse repo operations, banks deposit excess funds in the Reserve Bank of India (RBI) and earn interest on it.
Since lending to the central bank has no credit risk, there is no need to provide government securities as collateral when a market participant places his funds at RBI, the report said.
“As securities acquired under reverse repo are eligible for statutory liquidity ratio (SLR), it will thus ensure a total increase in bond demand,” the report said.
With the continuous liquidity support from the RBI, the liquidity position of the system surplus has increased significantly and the banks have parked an average of Rs 6 lakh crore in May compared to Rs 4.8 lakh crore in April and Rs 2.9 lakh crore in March under the reverse repo window of the RBI.
The report said in order to absorb excess liquidity from the system without the need to place collateral in exchange, the RBI has planned to introduce a (low) remuneration facility (SDF).
the Urjit Patel The Monetary Policy Committee had recommended this instrument and stated that this would be done with the discretion to set the interest rate without reference to the political target rate.
The committee recommended that the introduction of the standing deposit facility requires amendment of the RBI Act and may replace reverse repo in the long run.
“We believe that such uninsured absorption of liquidity from the central bank will pave the way for the government to suck out additional liquidity at lower costs through the SDF,” the report said.
The report also recommended that there should be no ceiling on the amount placed in the RBI window for the reverse repo, rather it should be abandoned and SDF should be introduced.
“Restricting the amount of reverse repo funds, as it was done in 2007, creates significant market distortions in land pricing metrics as well as the knock-on effect on the FX pricing metric,” it states.
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