With a view to promoting efficient liquidity management in the market between two weekly Treasury Bill auctions, the Bank of Mauritius will conduct, as from 15 December 1999, at its own initiative short term repurchase transactions (repos) and reverse repurchase transactions (reverse repos) as may be required in the light of prevailing money market conditions. Under a repo, the Bank of Mauritius will supply liquidity to the market by purchasing eligible securities from commercial banks with the agreement to resell them at a specified price on a given future date. Under a reverse repo, the Bank of Mauritius will absorb liquidity from the market by selling eligible securities to commercial banks with the agreement to repurchase them at a specified price on a given future date. Both repos and reverse repos will be conducted through an auctioning process under the umbrella of a Master Repurchase Agreement, which has already been signed by the Bank of Mauritius and commercial banks. Initially, the Bank of Mauritius will be entering into repurchase agreements exclusively with commercial banks to adapt the market to this new instrument. Eventually, the list of eligible counterparties may be extended to include non-bank financial institutions and non-domestic commercial banks in Mauritius meeting the criteria, which would be set by the Bank of Mauritius.

Furthermore, acting as lender of last resort, the Bank of Mauritius is introducing, effective 15 December 1999, a standing facility, known as the Lombard Facility, to provide overnight collateralized advances to commercial banks. The borrowing quotas of banks under the Lombard Facility, which are based on their Tier 1 capital, have been set for the period 15 December 1999 to 30 June 2000. This facility will be operated at the initiative of the commercial banks themselves and it will give banks the necessary means and confidence to engage actively in treasury management function, such as repurchase transactions. Each commercial bank will be able to draw down part or the full amount of the facility allocated to it to meet unexpected funding shortfalls on an overnight basis. For this purpose, commercial banks will assign a specified amount of eligible Government securities, which shall be either Treasury Bills or other bonds, acceptable to the central bank as collateral, whenever they resort to the Lombard Facility. The rate payable for use of this facility, the Lombard Rate, will be set by the Bank of Mauritius as a signalling mechanism on its monetary policy stance to market operators. The rate has been set at 14.0 per cent per annum and, other than carrying the advantage of being known in advance by commercial banks, it compares favourably with higher rates ranging from 17.2 per cent to 49.9 per cent that used to be applied in the last fiscal year to commercial banks’ overnight borrowings from the central bank. This measure is expected to give direction, stability and to provide greater flexibility to financial market operations in the implementation of monetary policy by the Bank.

Commercial banks are currently required to maintain a minimum average weekly reserve ratio of 5.5 per cent which is computed by reference to banks’ balances with the Bank of Mauritius and their cash in vault. The Bank of Mauritius proposes to reduce the minimum weekly reserve ratio to be observed by banks from 5.5 per cent to 5.0 per cent. For this purpose, reserves of banks are now being defined as balances held with the Bank of Mauritius only. Cash held by banks in their vaults is being excluded from the requirement. This is because cash in vault is a volatile element which does not lend itself to regular monitoring for compliance and its inclusion for the purposes of maintenance of the cash reserve ratio is not conducive to the development of a dynamic money market in Mauritius. Moreover, banks will not be allowed to let their balances with the Bank of Mauritius drop below 3.0 per cent of their deposits on any single day. The date of coming into effect of this measure will be the subject of a further communication to banks. However, banks should prepare themselves as from now for a finer management of their treasury function in the light of this forthcoming measure and in the context of the repurchase transactions put in place.

The Bank Rate will continue to be computed as the weighted average yield on 28-day, 91-day, 182-day and 364-day Treasury Bills at the weekly primary auctions and will necessarily be lower than the Lombard Rate referred to above.