laf n mss-rbi

1. LIQUIDITY ADJUSTMENT FACILITY
AND
MARKET STABILIZATION SCHEME:
AN OVERVIEW
SHREYA(75154)
VANI KALOTA(75163)

2. LIQUIDITY ADJUSTMENT FACILITY
(LAF)

3. HOW WAS IT INTRODUCED
After the BoP crisis and pressure from international
organizations like IMF and World bank, The GOI took several
steps to remodel the country's financial system.
The banking sector, handling 80% of the flow of money in
the economy, needed some serious reforms.
In the light of these requirements, two expert Committees
were set up in 1990s under the chairmanship of M.
Narasimham which are widely credited for spearheading
the financial sector reform in India.

4. The report recommended that the RBI withdraw from
the 91-day treasury bills market and that interbank call
money and term money markets be restricted to banks
and primary dealers.
Pursuant to the recommendations, the RBI introduced
a Liquidity Adjustment Facility (LAF) operated through
repo and reverse repos to set a corridor for money
market interest rates.
In April 1999, an Interim Liquidity Adjustment Facility
(ILAF) was introduced pending further up gradation in
technology and legal/procedural changes to facilitate
electronic transfer.

5. Transition from ILAF to LAF
In the first stage, w.e.f. june 5, 2000, fixed rate reverse repo gave
way to variable rate reverse repo auctions.
In the second stage, the repo rate was unified to the Bank Rate,
Thus, the repo rate emerged as the lending rate of the RBI for all
practical purposes.
The third stage of full-fledged LAF began with the full
computerization of the Public Debt Office (PDO) and the
introduction of the Real Time Gross Settlement (RTGS)
system enabling repo operations mainly through electronic
transfers and the operation of LAF at different times of the same
day.

6. What Does It Mean
Liquidity adjustment facility (LAF) is a monetary policy tool
which allows banks to borrow money through repurchase
agreements. LAF is used to aid banks in adjusting the day to
day mismatches in liquidity. This arrangement allows banks
to respond to liquidity pressures and is used by
governments to assure basic stability in the financial
markets.
LAF consists of repo and reverse repo operations.

7. Repo or repurchase option is a collaterised lending i.e.
banks borrow money from Reserve bank of India to meet
short term needs by selling securities to RBI with an
agreement to repurchase the same at predetermined rate
and date. Repo operations therefore inject liquidity into
the system. Repo transactions are usually made when the
call rate is below the repo rate
Reverse repo operation is when RBI borrows money from
banks by lending securities. The interest rate paid by RBI
is in this case is called the reverse repo rate. Reverse repo
operation therefore absorbs the liquidity in the system.
Reverse Repo transactions are usually made when the call
rate is above the repo rate

8. LAF CORRIDOR: THE DIFERENCE BETWEEN REPO AND REVERSE
REPO RATE ALLOWS FOR THE CALL MONEY RATE TO FLUCTUATE

9. MARKET
STABILISATION
SCHEME

10. WHY MSS IS INTRODUCED ?
• In year 2004, FIIs (Foreign Institutional Investors) started
bringing in dollars to buy Indian stocks.
• This results in an oversupply of US dollars in the Indian
market.
• RBI bought dollars to create an equivalent amount of rupees.
• This dollar buying raised forex reserves from $100 bn in
January 2004 to about $300 bn by 2007-08.
• Thus leads to liquidity overhang
• This has forced the government to mop up the rupees by
creating the MSS bonds.

11. INTRODUCTION
• MSS was introduced as an agreement between the
government of india (GoI) and the Reserve Bank of
India (RBI) in early 2004.
• Under the scheme, RBI issues bonds on behalf of the
government and the money raised under bonds is
impounded in a separate account(called MSS cash
account) with RBI and are used only for the purpose
of redemption/buy back of Treasury-Bills/Dated
Securities issued under the scheme.

12. • The bills/bonds issued under MSS would have all the
attributes of the existing Treasury Bills and dated
securities.
• The bills and securities will be issued by way of
auctions to be conducted by the Reserve Bank.
• The Reserve Bank will decide and notify the amount,
tenure and timing of issuance of such treasury bills
and dated securities.
• Whenever such securities are issued by the Reserve
Bank for the purpose of market stabilisation and
sterilisation, a press release at the time of issue
would indicate such purpose

13. • In 2003-04, the total outstanding obligations of the
Government by way of bills/securities thus issued
under the MSS from time to time would not exceed
Rs. 60,000 crore.
• The Reserve Bank of India (RBI) has capped the
outstanding balance under the market stabilization
scheme (MSS), for the fiscal year 2012-13 at 50,000
crore ($9.7 billion).

14. • Following the global financial crisis of 2008, that
necessitated fiscal stimulus measures, an
amendment to the original MoU between the RBI
and the GoI in February 2009 allowed the
Government to convert a portion of the MSS funds
into normal government borrowing for financing its
expenditure requirements.

15. IMPACT ON FISCAL/REVENUE
DEFICIT
• The bills and securities issued for the purpose of MSS
would be matched by an equivalent cash balance held by
the Government with the Reserve Bank. Thus, there will
only be a marginal impact on revenue and fiscal deficits
of the Government to the extent of interest payment on
bills/securities outstanding under the MSS. Further, the
cost would be shown separately in the Budget. This
would add transparency to the cost of sterilisation.

16. CURRENT RATES AND RATIOS
• Repo Rate under LAF- 7.50% (w.e.f.19/03/2013)
• Reverse Repo Rate under LAF - 6.50%
(w.e.f.19/03/2013)
• Bank rate- 8.50% (w.e.f. close of business
of 19/03/2013)
• Cash Reserve Ratio (CRR)- 4.00% (wef 09/02/2013)
• Statutory Liquidity Ratio (SLR)-
• 23%(w.e.f. 11/08/2012)

17. THANK- YOU