• PAGE ONE
• INDEX
• HOME

PDs unhappy with working of LAF

Our Bureau

MUMBAI, June 20

THE primary dealers are unhappy with the working of the liquidity adjustment facility (LAF) introduced recently.

Though leading PDs met RBI officials on Tuesday, the key issues could not be sorted out, said an official with a PD.

DFHI and STCI are understood to have told the central bank that the current call rates are very high and it was difficult for the PDs to survive in the prevailing volatility conditions.

In uncertain marker conditions last week, the call rates ruled around 12 to 15 per cent though the week, before touching 30 per cent on Friday.

The PDs told the RBI that with rates constantly moving upwards and their average cost of funding at about 10 per cent, it was not economical for them to remain in business.

Unless the LAF mechanism was changed, the operations of PDs would be severely affected, they said.

The RBI officials told PDs that the call rates were purely market determined and there was nothing the central bank can do about the situation.

The PDs have suggested streamlining LAF and conveyed their difficulties in market-determined auctions.

They told the RBI that unlike banks who can postpone their requirement and maintain only the statutory requirement of 65 per cent, PDs have limited spreads and sources. Hence, if their bids were rejected, they had no choice but to pick up the funds from the market at the existing rates, which may be high.

Meanwhile, the Reserve Bank of India today accepted 42 bids worth Rs. 3,815 crores at a cut-off of 14 per cent in the reverse repo auction. The RBI had received 52 bids worth Rs. 4,305 crores. After the auction, the rates came down slightly to close at a round 13 per cent levels.

Dealers in the markets said that the call rates were high because the cut-off rates under the LAF were rising every day. The lenders were, thus, taking advantage of the situation and quoting high rates.

Dealers expect the call rates to remain in the range of 15 per cent for the rest of the fortnight. ``The market is beginning to settle down at 15 per cent levels,'' said one dealer in a nationalised bank.