With liquidity deficit being way above its comfort level, the Reserve Bank of India (RBI) announced that it will reintroduce a second LAF window to inject cash into the system.
The RBI operates Liquidity Adjustment Facility (LAF) to help banks manage their liquidity position. The central bank said it will have a second LAF repo every Friday between 16:30 and 17:00 hours. At present, RBI operates the repo (injection) and reverse repo (absorption) auctions twice a day at 09:30-10:30 hours and 16:30-17:00 hours, respectively.
The second LAF repo has been reintroduced in response to suggestions from market participants and provide flexibility to market participants in their liquidity management, the RBI notification addressed to all commercial banks said. It will be operated on every Friday evening starting February 10 and in case of a holiday, it will be held on a working day preceding the set day, it said.
The system was in place earlier by middle of 2010 but was discontinued after liquidity position improved. Banks have been borrowing over 1.2 lakh crore through the LAF window for the past one month, while RBI has said that it was comfortable with overnight borrowing in the region of 60,000 crore.
Alarmed over the liquidity deficit in the system, it had slashed Cash Reserve Ratio or the percentage of deposits banks have to park with the RBI, by 0.50 percent to 5.5 percent which will inject additional 32,000 crore into the system.
1.2 lakh crore through the LAF window for the past one month, while RBI has said that it was comfortable with overnight borrowing in the region of 