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May 8, 2001
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Money > Business Headlines > Report May 8, 2001 |
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RBI moves to phase out fixed-rate refinanceNetScribes/Anil Varma Seen as the first step in a gradual phase-out of the fixed-rate refinance system, the Reserve Bank of India's back-stop refinance facility, which came into effect on Tuesday, will give the central bank better control over market liquidity and short-maturity interest rates, according to money market dealers. "The new system will ensure better liquidity control by the RBI, and will help it manoeuver the market in times of volatility, say, when the forex market is volatile," the treasury head with a foreign bank said. Under the new system, one-third of the total refinance available to market players from the RBI would be priced at a market-determined rate, while the remaining two-thirds will continue to carry a rate equal to the Bank Rate. The RBI had unveiled the new scheme in its Monetary and Credit Policy for 2001-02 released last month. The quantum of refinance at variable rate is to be priced 1 per cent above the RBI reverse repo rate or two to three per cent above the National Stock Exchange's benchmark Mumbai Interbank Bid Rate. On Tuesday, the rate on the variable component of the refinance was fixed at 9.75 per cent, one per cent above the RBI's 8.75 per cent reverse repo rate. "The back-stop facility reflects the RBI's move towards a market-determined mechanism for fixing rates," a primary dealer said. "This is the beginning of a gradual phase-out of fixed rate fund support from the RBI." The new scheme reduces the availability of low-cost refinance to market players and thus effects an increase of demand in the call market. "Players may borrow in call to repay the higher-cost portion of their refinance exposure," a dealer with a state-owned bank said. On Tuesday, the call rate touched 9 per cent after the RBI announced its variable refinance rate, from the 8.00-8.25 per cent range dealt in morning trade. On the other hand, the new system also may prevent any sudden flare-up of the call rate, since the assurance that funds are available from the RBI at a certain level would prompt borrowers to resist steep rises in the overnight rate. |
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