Relaunch of interest rate futures on radar

Outlook/ Money markets

 The last policy witnessed a 50 basis point (bp) cut in the savings bank rate from 4 per cent to 3.5 per cent.

 The RBI cut the bank rate from 6.25 per cent to 6 per cent and the cash reserves ratio dropped from 4.75 per cent to the present 4.5 per cent.

 The ready-forward facility, which comes under the liquidity adjustment facility of the RBI and is better known as the repo window, witnessed a cut of 50 bp to bring it down from 5 percent 4.5 per cent. on August 2003.

 As a policy decision, the RBI continued moves to phase out non-bank players from the inter-bank call money lending and borrowing market.

 While phase I allowed non-bank participants to lend up to 85 per cent of their average daily lending during 2000-01, in phase II the limit was further pruned down to 75 per cent.

 On the other hand, collateralised lending and borrowing obligation was made operational as a money market instrument in order to reduce the reliance of market participants to the call market.

 In order to enable the participants to manage risk in a better way, the RBI introduced futures on interest rates . However, the product, due to some inherent pricing inefficiencies and one-way participation by banks , failed to take off.

 It is in the process of being relaunched. In the light of these facts, the market is of the view that the ensuing credit policy will proceed on these lines while taking new steps to further strengthening the market infrastructure.

 They feel that the RBI is likely to make the repo rate variable in order to accept excess liquidity at differential rates depending on the demand and supply situation.

 As a variation of the product, different rates are being mooted for different tenors of repo.

 These will be accompanied by a bank rate cut of 25-50 basis points