The Reserve Bank of India (RBI) will no longer announce the back-stop facility rate. The central bank, in a press release issued today, said, banks and primary dealers who wish to avail the facility will have to directly approach the deposit accounts department of the apex bank to ascertain the rate applicable for the facility.
It also said that the rate for the back-stop facility will depend upon the assessment of the liquidity condition in the market. Currently, the rate is being announced daily along with the liquidity adjustment facility (LAF) results.
"The decision will increase the demand in the call money market as there will be uncertainty over the back-stop facility rate and players will not know how much premium they have to pay if they want to avail that," said the chief dealer of a private sector bank.
A primary dealer, however, said that the impact will be minimum as very few players in general opt for the facility.
The RBI, in its credit policy, has splited the liquidity facilities available to the banks and the primary dealers into two parts -- normal facility and the back-stop facility.
While the normal facility constitutes about two-thirds, the back-stop facility constitutes one-third.
However, the central bank, in consultation with the market participants, has decided to implement multiple-price method for the daily LAF.
Earlier on May 8, the apex bank introduced the multiple-price auction system on an experimental basis.
Dealers in the money market said the auction brought more discipline in the bidding and hence the continuance of the same is a logical move.
The apex bank also said that it can introduce a longer-term repo of the 14 days as and when necessary.
