RBI Announces Further Measures for Monetary and Liquidity Management: Banknet India

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RBI Announces Further Measures for Monetary and Liquidity Management- Cuts repo rate, CRR, SLR

In its Mid-Term Review of Monetary Policy on October 24, 2008, the Reserve Bank of India indicated that it will closely and continuously monitor the liquidity and monetary situation and respond swiftly and effectively to the impact of the global developments on Indian financial markets. The Reserve Bank also indicated that the challenge for the conduct of monetary policy is to strike an optimal balance among preserving financial stability, maintaining price stability and sustaining the growth momentum.

In response to emerging global developments, the Reserve Bank has taken a number of measures since mid-September 2008. The aim of these measures was to augment domestic and forex liquidity and to enable banks to continue to lend for productive purpose while maintaining credit quality so as to sustain the growth momentum. The following is a synopsis of the important measures taken:

Monetary Measures

The repo rate under the liquidity adjustment facility (LAF) has been reduced by a cumulative 150 basis points since October 20, 2008. Accordingly, the repo rate has been brought down from 9.0 per cent to 7.5 per cent.

Rupee Liquidity

In order to enhance rupee liquidity, the cash reserve ratio (CRR) has been reduced by a cumulative 3.5 percentage points of net demand and time liabilities (NDTL) since October 11, 2008. Accordingly, the CRR has been brought down from 9.0 per cent to 5.5 per cent of NDTL.

The statutory liquidity ratio (SLR) has been reduced by one percentage points, that is, from 25 per cent of NDTL to 24 per cent.

A term repo facility for an amount of Rs.60,000 crore has been instituted under the LAF to enable banks to ease liquidity stress faced by mutual funds (MFs) and non-banking financial companies (NBFCs) with associated SLR exemption of 1.5 per cent of NDTL.

The Reserve Bank provided an advance of Rs.25,000 crore to financial institutions under the Agricultural Debt Waiver and Debt Relief Scheme pending release of money by the Government.

A special refinance facility has been introduced for scheduled commercial banks (excluding regional rural banks or RRBs) with a limit of 1.0 per cent of each bank's NDTL as on October 24, 2008 at the LAF repo rate up to a maximum period of 90 days. During this period, refinance can be flexibly drawn and repaid.

The Reserve Bank has put in place a mechanism to buy back dated securities issued under the market stabilisation scheme (MSS) so as to provide another avenue for injecting liquidity of a more durable nature into the system.

Forex Liquidity

The Reserve Bank announced that it would continue to sell foreign exchange (US dollars) through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps.

The Reserve Bank announced that it would institute special market operations to meet the foreign exchange requirements of public sector oil marketing companies against oil bonds when they become available.

The interest rate ceilings on FCNR (B) and NR(E)RA term deposits were increased by 100 basis points each.

External commercial borrowings (ECBs) up to US $ 500 million per borrower per financial year were permitted for rupee expenditure and/or foreign currency expenditure for permissible end-uses under the automatic route.

The all-in-cost ceiling for ECBs for average maturity period of three years and up to five years was enhanced to 300 basis points above LIBOR and to 500 basis points above LIBOR for ECBs over five years.

The all-in-cost ceiling for trade credit less than 3 years was enhanced to 6 months LIBOR plus 200 basis points.

Systemically Important Non-Deposit taking NBFCs have been temporarily permitted to raise short-term foreign currency borrowings under the approval route, subject to their complying with the prudential requirements of capital adequacy and exposure norms.

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