Commodity Online
MUMBAI: In an unexpected move, the Reserve Bank of India has further reduced the repo rate by 50 basis points to 7.5 percent from 8 percent and cash reserve ratio (CRR) by 100 basis points from 7.5% to 6.5%. CRR reduction would be carried out in 2 stages.
RBI said in a press release that further measures were in addition to recent reductions in key rates were taken after reviewing the current and evolving macroeconomic situation, liquidity conditions in the global and financial markets.
The new CRR rate would be effective from November 8 aimed at generating Rs 40,000 cr liquidity in the system. The cash reserve ratio (CRR) will be effected in two stages: by 50 basis points retrospectively with effect from the fortnight beginning October 25, and by a further 50 basis points prospectively with effect from the fortnight beginning November 8, 2008. This measure is expected to release around Rs.40,000 crore into the system.
The Repo rate will be effective from November, 3, 2008, RBI stated. Additional liquidity support under LAF given to scheduled banks to the extent of one percent of the net demand and time liabilities (NDTL) and waiver of penal interest which was announced as a temporary measure on September 16, 2008 has been made permanent.
Accordingly, the Statutory Liquidity Ratio (SLR) will stand reduced to 24 per cent of NDTL with effect from the fortnight beginning November 8, 2008.
Other highlights
In order to provide further comfort on liquidity and to impart flexibility in liquidity management to banks, it has been decided to introduce a special refinance facility under Section 17(3B) of the Reserve bank of India Act, 1934. Under this facility, all scheduled commercial banks (excluding RRBs) will be provided refinance from the Reserve Bank equivalent to up to 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.
On October 15, 2008 the Reserve Bank announced, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds (MFs) to the extent of up to 0.5 per cent of their NDTL. A similar facility of liquidity support for non-banking financial companies (NBFCs) is also found to be necessary to enable them to manage their funding requirements.
Accordingly, it has now been decided, on a purely temporary and ad hoc basis, subject to review, to extend this facility and allow banks to avail liquidity support under the LAF through relaxation in the maintenance of SLR to the extent of up to 1.5 per cent of their NDTL.
This relaxation in SLR is to be used exclusively for the purpose of meeting the funding requirements of NBFCs and MFs. Banks can apportion the total accommodation allowed above between MFs and NBFCs flexibly as per their business needs.
As indicated in the Reserve Bank's press release of September 16, 2008, as on some previous occasions, the Reserve Bank will continue to sell foreign exchange (US dollar) through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps.
The Reserve Bank would either sell the foreign exchange directly or advise the bank concerned to buy it in the market. All the transactions by the Reserve Bank will be at the prevailing market rates and as per market practice. Entities with bulk forex requirements can approach the Reserve Bank through their banks for this purpose.
It has been decided, as a temporary measure, to permit Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFCs-ND-SI) to raise short- term foreign currency borrowings under the approval route, subject to their complying with the prudential norms on capital adequacy and exposure norms. Details in this regard have been notified separately and are available on the Reserve Bank's web site.
Under the Market Stabilisation Scheme (MSS), Government Securities (treasury bills and dated securities) have been issued to sterilise the expansionary effects of forex inflows. In the context of forex outflows in the recent period, it has been decided to conduct buy-back of MSS dated securities so as to provide another avenue for injecting liquidity of a more durable nature into the system.
This will be calibrated with the market borrowing programme of the Government of India. The securities proposed to be bought back and the timing and modalities of these operations are being notified separately.
