RBI allows oil bonds as collateral for liquidity operations

MUMBAI: The Reserve Bank of India has relaxed norms for its liquidity operations extending the set of securities that are used as collateral. It can now suck out excess cash in the banking system using pledges like oil bonds — a move that will allow banks to lend more funds to the central bank amid swelling liquidity, triggered by the government's demonetisation scheme.  "It has been decided that the

oil bonds issued by government of India will qualify as eligible securities for repos, reverse repos and marginal standing facility (MSF)," RBI said in a notification on Friday. "The E-Kuber system will now accept oil bonds as eligible collateral..."

The central bank takes out surplus cash through a mechanism called reverse repo auction, where banks park funds against pledges, provided by RBI.

The central bank has already exhausted its existing stock of collateral (government bonds). The daily liquidity glut has grown as high as about Rs 5.20 crore on Friday while RBI would be holding Rs 7.5 lakh crore worth of sovereign securities.

Banks borrow money from RBI via repo window.

"Inclusion of Oil bond and removing hair cut in reverse repo will create additional room for RBI to continue sterilisation in the current situation through Reverse Repo window," said Soumyajit Niyogi, Associate Director, Credit & Market Research Group, India Ratings.

The government issues oil bonds to public sector oil marketing companies including Bharat Petroleum, Indian Oil Corporation, who can sell them in the secondary market. They are also used as collateral for raising funds.

There are about Rs 45,000 crore of such bonds outstanding in the market, show an estimate from India Ratings.

"RBI needs more such securities to suck out excess liquidity in the banking system," said Ashutosh Khajuria, ED of Federal Bank. "This will enable them to conduct reverse repo auctions with the liquidity rising every day."

It has been decided to do away with the margin requirement for the securities provided by Reserve Bank of India as collateral to the successful participants in Reverse Repo operations (including Term Reverse Repos), RBI said.