The Reserve Bank of India (RBI) has expanded the participation of Standalone Primary Dealers (SPDs) in all Repo operations, irrespective of the tenor. This move is aimed at enhancing liquidity management in the financial system.
What are Standalone Primary Dealers (SPDs)?
They are Specialized entities authorized by the RBI to:
- Buy and sell government securities.
- Facilitate the government’s borrowing program.
- Provide liquidity in the secondary market.
Unlike banks, SPDs operate independently and are not part of any commercial bank or financial institution.
Recent RBI’s Policy Changes for SPDs:
- SPDs can now borrow in foreign currency from their parent companies or other authorized entities.
- SPDs can access overdraft facilities in nostro accounts, but solely for operational use.
Key Changes in Repo Market Participation
Previous Rules:
- SPDs were only allowed in overnight liquidity management operations, excluding the Marginal Standing Facility (MSF).
- Participation in Variable Rate Repo (VRR) operations was on a case-to-case basis.
New Provisions:
- SPDs can now participate in all RBI Repo operations, irrespective of the tenor.
- This move enables SPDs to play a bigger role in managing liquidity in the financial system.
Why this change?
The RBI has been injecting liquidity into the banking system due to a higher deficit liquidity scenario. Liquidity infusion tools used in recent months:
- Daily VRR auctions
- Long-term VRR auctions
- USD/INR Buy/Sell swap auctions
- Open Market Operations (OMO) – Government Securities Purchases
Current Liquidity Scenario:
Liquidity in the banking system remains in deficit despite RBI’s interventions. The estimated liquidity deficit stands at ₹1.58 lakh crore.
Expected Benefits of RBI’s Decision
- Enhances liquidity management, ensuring smoother operations in financial markets.
- Strengthens the role of SPDs in government securities and debt markets.
- Improves efficiency in the repo market, supporting better price discovery.
- Reduces liquidity stress in the banking system, ensuring smoother monetary policy transmission.