Poor response to special LAF forces RBI to cut repo rate

Poor response from banks to the 9 per cent 14-day special repo auction for Rs20,000 crore has forced the Reserve Bank of India to cut the daily repo rate to 8.0 per cent from 9.0 per cent.

The RBI had also extended the special auction for the short-term lending facility until the entire amount has been subscribed to. The special short-term lending facility was meant to help mutual funds meet redemption pressure.

The central bank received no bids under the daily repo auctions, signalling an improvement in the liquidity conditions in the system. RBI today cut its short-term lending rate by one per cent to eight per cent.

The daily liquidity adjustment facility (LAF) auction conducted by the RBI on Monday had no takers despite the fact that it was for two days in view of the strike called by the RBI employees tomorrow.

The RBI had already infused more liquidity through slashing the cash reserve ratio for banks by 2.5 per cent from 11 October and opening a special window for mutual funds.

These measures are estimated to have added nearly Rs 150,000 crore into the system, while another Rs25,000 crore will be delivered to the banks to compensate the farm-loan waiver.

Eligible banks and primary dealers (PDs) may submit their applications electronically through NDS between 2.30 pm to 3.15 pm. Allocations would normally be made on a pro-rata basis in case the tenders exceed the notified amount. The RBI will now auction Rs16,500 crore to the eligible banks and primary dealers.