Saturday, June 16, 2007

Answers to some shout-box queries -3

Here are answers to some more of your shout-box queries.

vinod: What is the implication of nationalisation of venezuela's oil companies in the global oil prices?

What I foresee is a temporary spike in the prices. US (which sources most of the Venezeulan oil) will always find a quick substitute. This may lead to a temporary spike in international markets. But before it could do much damage on this count, either Venezuela will see the futility of losing US or it would have started pumping all that oil into international markets, which is sure to lead to a dampening effect.

So other than some temporary hickups, I can't foresee much trouble ahead on this count.

Daya: Sir... As per current definition of repo... it means injecting the liquidity... can you please explain how it inject liquidity? which rate is higher... repo or reverse rapo? And why?

Repo rate is the rate at which a loan is granted when an asset is given as collateral or security for the loan, and where the asset will be repossessed by the borrower to redeem the loan. When loan is so given by RBI (to banks and FIs) it injects money into the system. At present the repo rate is 7.75%. That means, this is the interest rate at which banks and FIs will have to borrow from RBI. If this rate is lowered, liquidity in the system will go up -- there is more money in the market. If this rate is hiked, it will drain away liquidity from the system. Because it is more costly to borrow at higher rates, banks and FIs will desist from borrowing more from RBI. This results in less availability of money in the system.

A reverse repo rate is the rate at which RBI mops up liquidity from the system by offering securities. At the moment this rate is 6%.

It is very easy to get confused with both the rates and their purposes. Actually calibrating one of these rates will result in either increase or decrease in money supply in the system. But which one to calibrate is a decision that RBI takes depending on its policy stance at that particular time.

There is nothing to show that one rate will always be higher than the other. It depends on the requirements/policy stance of the RBI at that particular point in time. At the moment the repo rate is higher than the reverse repo rate.

A look at the money market operations figures of RBI for a particular day, perhaps will give us more insight into the concept. I chose the latest one available from RBI's web site -- June 14, 2007.

Liquidity Adjustment Facility

(i) Repo ( 1 Day) 0.00 7.75

(ii) Reverse Repo ( 1 Day) 2,999.00 6.00

That statement shows that there are no repo transactions for the day. That is nobody came forward to take money from the RBI by pledging securities. But there are transactions under reverse repo. RBI has mopped up Rs. 2,999 crores from the system by taking money against its securities from the market participants. It means that banks and FIs have come forward to lend money to RBI. In other words, it has mopped up money from the system.

Hope this clarifies the concept.

deepak: sir , can you provide some insight on the topic "cblo-colletarized borrowring and lending obligation" in indian context. thankyou

Collateralised Borrowing and Lending Obligation (CBLO), is a money market instrument for the benefit of the entities who have either been phased out from inter bank call money market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain Current account with RBI.

CBLO is explained as under:

  • An obligation by the borrower to return the money borrowed, at a specified future date;
  • An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received;
  • An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.


Membership (including Associate Membership) of CBLO segment is extended to banks, financial institutions, insurance companies, mutual funds, primary dealers, NBFCs, non-Government Provident Funds,. Corporates etc. The Members are required to open Constituent SGL (CSGL) Account with CCIL for depositing securities which are offered as collateral / margin for borrowing and lending of funds. Besides, Associate Members are required to open a current account with a Settlement Bank designated by CCIL for settlement of funds.

Eligible Securities:

Eligible securities are Central Government securities including Treasury Bills.

Collateralised Borrowing and Lending Obligation (CBLO) was operationalised as a money market instrument through the CCIL on January 20, 2003. With a view to developing the market for the CBLO, it was exempted from CRR. Furthermore, securities lodged in the gilt accounts of the bank maintained with the CCIL under the Constituent`s Subsidiary General Ledger (CSGL) facility and remaining unencumbered at the end of any day can be reckoned for SLR purposes. The wider usage of the instrument is expected to receive impetus from the establishment of real time connectivity between the Public Debt Office (PDO) of the Reserve Bank and the CCIL and value-free transfer of securities between market participants and the CCIL.

The collateralised market is now the predominant segment in the money market, accounting for about 70 per cent of the total volume during 2006-07 . Mutual funds and insurance companies are the major lenders in the CBLO market with nationalised banks, primary dealers and non-financial companies being the major borrowers.

vinod: Under whose control does the CBI come?Why was it constituted and when is it called into service?

Instead of reproducing something which is already available on the web, I would prefer to point you to this. Follow this link. It was founded in 1941. Look at its history here.

rakhi: what is the difference between a council , committee and commission ?

Nothing much at all. The naming is just a matter of how and by whom they are constituted. You have religious councils, scientific councils, city councils etc. Committees are constituted to usually look into specific issues. That 'look into' may include an enquiry, deeper study, or plain and simple negotiation with somebody to solve a pending issue etc. A commission usually connotes the involvement of quasi-judicial or judicial authority or power being vested in it in deciding about the subject that it is entrusted with. There is no hard and fast rule as to the constitution or naming of these bodies anywhere to my knowledge. If there is any such thing, I would be glad if any one of you can chip in with the info.