What changed
The quantum of liquidity provided through overnight repos under the Liquidity Adjustment Facility was reduced from 0.5% to 0.25% of each bank's Net Demand and Time Liabilities (NDTL). This change took effect from April 1, 2014, as announced in the First Bi-monthly Monetary Policy Statement 2014-15. All other LAF terms and conditions remained unchanged.
What it means for you
Banks and standalone primary dealers now have access to only half the previous overnight repo liquidity relative to their NDTL, tightening short-term funding availability. This move signals RBI's intent to gradually withdraw excess liquidity and nudge market rates closer to the policy repo rate. Lenders may need to rely more on other sources like the term repo or market borrowings for daily cash management.
What you must do
- Recalibrate daily liquidity forecasting to reflect the reduced overnight repo limit of 0.25% of NDTL.
- Explore alternative liquidity sources such as term repos, market borrowings, or interbank call money to meet shortfalls.
- Update internal treasury and ALM systems to incorporate the new LAF cap for compliance and reporting.
- Communicate the change to treasury and risk management teams to adjust funding strategies.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Standalone Primary Dealers
Does this change affect the LAF repo rate or other terms?
No, only the quantum of overnight repo liquidity was reduced. The repo rate, reverse repo rate, and all other LAF terms remain unchanged.
Why did RBI reduce the overnight repo quantum?
The reduction was part of the First Bi-monthly Monetary Policy Statement 2014-15, aimed at gradually absorbing excess liquidity and aligning short-term rates with the policy rate.