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Journalism of Courage
PANAJI, MARCH 4: The Reserve Bank of India (RBI) is examining whether its failure to credit the current account of a bank was responsible for a series of defaults in the money markets on Thursday, a senior official of the central bank said on Saturday.
"We are looking into it," the official who declined to be identified told Reuters on the sidelines of a money markets conference in Panaji in the resort state of Goa.
There were reports that the repo market collapsed on Thursday with at least 10 market participants defaulting by around Rs 100 crore after the central bank failed to credit the current account of a selling bank as part of its open market operations.
The market participants named included Banque Nationale De Paris, Catholic Syrian Bank, American Express Bank, Tata Finance and the Discount and Finance House of India (DFHI).
The defaults were triggered by atranaction in which a bank sold Rs 100 crore worth of treasury bills to DFHI, which then on-sold them to the RBI at its open market purchase window. Banks are not allowed direct access to the open marketpurchase window and most of them generate liquidity from the central bank by using primary dealers.
"The RBI accounting system, which should have credited thecurrent account of the bank as well as the primary dealer while debiting the securities general ledger (SGL) account, failed to credit the bank’s account," a senior DFHI official was quoted as saying.
"This created a hole in the liquidity available with the system. In a tightly interlinked money market, this liquidity mismatch led to the bank defaulting in its payment obligations, which in no time snowballed to involve at least 10 players and transactions exceeding Rs 100 crore," the official said.
While the payments were finally settled on Friday at Thursday’s rates, primary dealers said the episode necessitated the need for RBI to put in place an intra-day liquidity facility against undrawn balances which will be automatically triggered.
"Primary dealers could have been given liquidity against their undrawn facility as they had securities and could have sought liquidity against it," a primary dealer said.
A senior treasury official at American Express Bank, which is one of the banks named, said: "We were not involved in any repo transactions. We entered into an outright deal for Rs 100 crore the day before yesterday (Thursday) and from our side, the SGL was delivered on time."
