What changed
RBI introduced a cap on LAF borrowing for standalone Primary Dealers, limiting total funds available to 100% of their net owned funds as per the latest audited balance sheet. This cap applies to the combined allocation from both the morning LAF repo and the additional LAF repo conducted on reporting Fridays. The change took effect from July 24, 2013.
What it means for you
Standalone Primary Dealers now face a hard borrowing limit under LAF, directly linked to their net owned funds. This restricts their ability to access liquidity from RBI, potentially impacting their market-making and treasury operations. Banks dealing with PDs should reassess counterparty exposure and liquidity risk, as PDs may need to adjust funding strategies.
What you must do
- Review your standalone PD counterparties' net owned funds to assess their new LAF borrowing capacity.
- Update internal risk limits for PD exposures considering the reduced liquidity access.
- Monitor PDs' funding sources and market behavior post-cap for signs of stress or altered trading patterns.
- Communicate with PD counterparties to understand their revised liquidity management plans.
Who it affects
Standalone Primary Dealers, Banks with exposure to standalone Primary Dealers, RBI's monetary operations team
What is the new LAF cap for standalone Primary Dealers?
The total LAF borrowing for a standalone PD is capped at 100% of its net owned funds as per the latest audited balance sheet, effective July 24, 2013.
Does this cap apply to both regular and additional LAF repos?
Yes, the cap applies to the combined allocation from the morning LAF repo and the additional LAF repo conducted on reporting Fridays.
Why did RBI introduce this cap?
RBI announced this as part of additional measures to address exchange rate volatility, aiming to tighten liquidity access for standalone PDs.