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RBI to allow repo in short-term debt

Thursday, 13 December 2012 - 4:26am IST | Place: Mumbai | Agency: dna
RBI is looking at allowing short-term debt instruments such as commercial papers and certificates of deposits to be used for borrowing overnight funds under market repo.

The Reserve Bank of India (RBI) is looking at allowing short-term debt instruments such as commercial papers (CPs) and certificates of deposits (CDs) to be used for  borrowing overnight funds under market repo.

While companies issue CPs, banks issue CDs to raise funds for tenures up to one year.
“Given that not much of transactions happen and also that there is demand, we will allow repo in CDs and CPs,” H R Khan, deputy governor, RBI, said at an even organised by the CII.

The central bank also allows repo on corporate bonds, which are of longer tenures.

Banks and financial institutions such as mutual funds and insurance companies lend and borrow overnight funds at the market repo rate. To borrow funds from the RBI, banks and primary dealers are only allowed to use government bonds.

While the repo rate, or the rate at which banks borrow from the RBI, is at 8%, the market repo rate is dependent on liquidity conditions.

Khan also said that the regulator is contemplating allowing foreign institutional investors to participate in currency futures. This would help them hedge against exchange rate volatility.




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