The Reserve Bank of India has today placed on its website 'Draft Guidelines for Accounting for Repo/Reverse Repo Transactions' for comments/views. Comments/views on the draft guidelines may, by December 15, 2008, be sent to the Chief General Manager, Internal Debt Management Department, Reserve Bank of India, Mumbai 400001 or can be emailed.

The proposed draft guidelines seek to revise the guidelines issued in March 2003 which treated 'repo' as a combination of two independent sale/purchase transactions as per the legal provisions prevailing then. The Reserve Bank of India (Amendment) Act 2006 subsequently defined 'repo' as 'an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed'. The accounting norms now propose to capture the economic essence of 'repo' as a collateralised lending/ borrowing transaction that is structured as a legal sale / purchase of securities as recognised by the RBI (Amendment) Act, 2006. The amendment in the accounting norms would bring such transactions on to the balance sheet of the repo participants in its true economic sense, thus enhancing transparency.

The salient features of the revised draft guidelines are:

• The securities sold under repo would continue to be reflected in the investment account of the repo seller. Accordingly, the repo buyer would not reflect the securities acquired under repo in his investment account. The actual movement of securities between repo buyer and repo seller would, however, be reflected through contra entries in the balance sheet.
• The securities acquired under repo would continue to be reckoned as liquid assets for the purpose of Section 24 of BR Act, 1949 in the books of the repo buyer. Accordingly, the securities sold under repo would not be accorded the benefit of Statutory Liquidity Ratio (SLR) for the repo seller, even though the seller's investment account would continue to show the securities sold under repo.
• The liabilities on account of repo borrowing would be included in the net demand and time liabilities (NDTL) calculation for maintenance of cash reserve ratio (CRR). However, inter-bank repo transactions would continue to be netted, as hitherto.
• The movement of securities should also be accounted for in the books of the counterparties by showing it as contra entries for the sake of greater transparency.

The Reserve Bank of India will finalise and issue the guidelines after examining the views / feedback received.