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July 7, 2001
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Money > Business Headlines > Report July 7, 2001 |
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RBI may extend special repo line to UTIBS Banking Bureau The Reserve Bank of India is exploring the possibility of a special repurchase arrangement with the beleaguered Unit Trust of India. The objective behind this arrangement is two-fold: to offer temporary liquidity support to the mutual fund as well as protect the government securities market from crashing. According to sources, the apex bank is afraid that if UTI starts offloading its gilts portfolio in the secondary market in a big way, gilts prices will crash distorting the yield curb. UTI's flagship scheme US-64 has about 20 per cent of its holdings in government securities. In absolute term, it translates into Rs 30 billion. "The collective exposure of all UTI schemes to the gilts market will be to the tune of at least Rs 50 billion. If UTI starts offloading this portfolio in the market to generate liquidity, the market will crash. The RBI's proposed arrangement is more to save the market than extending liquidity support to the trust," a source said. In other words, the central bank wants to insulate the gilts market from the UTI crisis, which has already had its impact on the equity market. Finance minister Yashwant Sinha discussed the issue with RBI governor Bimal Jalan early this week. "The central bank has not committed any liquidity support yet but is exploring the possibility of a special repo arrangement," said the source. If it works out, the RBI may extend a long repo (about six months) to UTI, which will buy back the gilts later. If six months down the line, UTI is not in a position to buy back the gilts it will devolve on the RBI. In other words, it will increase the net RBI credit to government and the impact will be felt in next year's budget. "It's a money supply neutral transaction and a win-win situation for both the government and the UTI," analysts said. The exact size of the deal will depend on the rush for repurchase of US-64. "It may not be a bulk repo deal. There could a series of repos over the next few months depending on the rush for repurchase once UTI opens the window," sources said. In 1999, the RBI had extended a Rs 8 billion repo line to UTI to tide over the crisis. This time around, UTI has already sounded out a clutch of banks and financial institutions for liquidity support. Powered by YOU MAY ALSO WANT TO READ:
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