Business Standard

RBI clamps down on easy money, again

Overnight rates may hit double digits; bond yields to spike

BS Reporter  |  Mumbai 

Exactly a week after tightening liquidity to stabilise the volatility of the rupee, the Reserve Bank of India (RBI) on Tuesday imposed new restrictions on commercial banks’ access to cash.

Experts said call rates and would rise sharply as a result of the action. “The impact of the steps will have significant impact on banks. Both call rates and will increase sharply,” said Andhra Bank Chairman and Managing Director B Prabhakar.



The rupee, which has been one of Asia’s worst-performing currencies this year and has fallen 10 per cent against the since the start of May, on Tuesday closed slightly weaker at 59.76 a dollar.

In a statement, said banks would be permitted to borrow under the liquidity adjustment facility (LAF) only up to 0.5 per cent (lowered from one per cent) of their net deposits and time liabilities at the benchmark interest rate of 7.25 per cent.

Additionally, has tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central bank. Now, banks will have to hold cash equivalent of at least 99 per cent of on a daily basis, compared with 70 per cent earlier. While the borrowing norms will be effective immediately, the stipulation on will take effect from next fortnight.

has not lowered the aggregate borrowing cap of Rs 75,000 crore through that it had set last Monday in its first round of liquidity-tightening measures. In effect, however, banks’ borrowings will be reduced by half. If banks want more funds, they will have to borrow from the marginal standing facility (MSF), under which interest is charged at higher rate of 10.25 per cent.

“Effectively, the repo rate becomes the marginal standing facility rate, and we have to adjust to this new rate regime. The steps show the central bank wants to stabilise the rupee,” said SBI Chairman Pratip Chaudhuri.


RBI’s recent steps to curb forex market volatility
July 8
  • Banks barred from proprietary trading in currency futures and exchange-traded options
  • Lenders allowed to trade only on behalf of clients
July 15
  • Borrowings under capped at ~75,000 crore
  • The lending rate for MSF fixed 300 basis points above repo rate, at 10.5%
  • Open-market sale of bonds worth ~12,000 crore
July 22
  • borrowing cap further tightened to 0.5% of each bank’s deposits
  • Banks must keep daily balance of 99% of requirement

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RBI clamps down on easy money, again

Overnight rates may hit double digits; bond yields to spike

Overnight rates may hit double digits; bond yields to spike Exactly a week after tightening liquidity to stabilise the volatility of the rupee, the Reserve Bank of India (RBI) on Tuesday imposed new restrictions on commercial banks’ access to cash.

Experts said call rates and would rise sharply as a result of the action. “The impact of the steps will have significant impact on banks. Both call rates and will increase sharply,” said Andhra Bank Chairman and Managing Director B Prabhakar.

The rupee, which has been one of Asia’s worst-performing currencies this year and has fallen 10 per cent against the since the start of May, on Tuesday closed slightly weaker at 59.76 a dollar.

In a statement, said banks would be permitted to borrow under the liquidity adjustment facility (LAF) only up to 0.5 per cent (lowered from one per cent) of their net deposits and time liabilities at the benchmark interest rate of 7.25 per cent.

Additionally, has tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central bank. Now, banks will have to hold cash equivalent of at least 99 per cent of on a daily basis, compared with 70 per cent earlier. While the borrowing norms will be effective immediately, the stipulation on will take effect from next fortnight.

has not lowered the aggregate borrowing cap of Rs 75,000 crore through that it had set last Monday in its first round of liquidity-tightening measures. In effect, however, banks’ borrowings will be reduced by half. If banks want more funds, they will have to borrow from the marginal standing facility (MSF), under which interest is charged at higher rate of 10.25 per cent.

“Effectively, the repo rate becomes the marginal standing facility rate, and we have to adjust to this new rate regime. The steps show the central bank wants to stabilise the rupee,” said SBI Chairman Pratip Chaudhuri.


RBI’s recent steps to curb forex market volatility
July 8
  • Banks barred from proprietary trading in currency futures and exchange-traded options
  • Lenders allowed to trade only on behalf of clients
July 15
  • Borrowings under capped at ~75,000 crore
  • The lending rate for MSF fixed 300 basis points above repo rate, at 10.5%
  • Open-market sale of bonds worth ~12,000 crore
July 22
  • borrowing cap further tightened to 0.5% of each bank’s deposits
  • Banks must keep daily balance of 99% of requirement
image
Business Standard
177 22

RBI clamps down on easy money, again

Overnight rates may hit double digits; bond yields to spike

Exactly a week after tightening liquidity to stabilise the volatility of the rupee, the Reserve Bank of India (RBI) on Tuesday imposed new restrictions on commercial banks’ access to cash.

Experts said call rates and would rise sharply as a result of the action. “The impact of the steps will have significant impact on banks. Both call rates and will increase sharply,” said Andhra Bank Chairman and Managing Director B Prabhakar.

The rupee, which has been one of Asia’s worst-performing currencies this year and has fallen 10 per cent against the since the start of May, on Tuesday closed slightly weaker at 59.76 a dollar.

In a statement, said banks would be permitted to borrow under the liquidity adjustment facility (LAF) only up to 0.5 per cent (lowered from one per cent) of their net deposits and time liabilities at the benchmark interest rate of 7.25 per cent.

Additionally, has tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central bank. Now, banks will have to hold cash equivalent of at least 99 per cent of on a daily basis, compared with 70 per cent earlier. While the borrowing norms will be effective immediately, the stipulation on will take effect from next fortnight.

has not lowered the aggregate borrowing cap of Rs 75,000 crore through that it had set last Monday in its first round of liquidity-tightening measures. In effect, however, banks’ borrowings will be reduced by half. If banks want more funds, they will have to borrow from the marginal standing facility (MSF), under which interest is charged at higher rate of 10.25 per cent.

“Effectively, the repo rate becomes the marginal standing facility rate, and we have to adjust to this new rate regime. The steps show the central bank wants to stabilise the rupee,” said SBI Chairman Pratip Chaudhuri.


RBI’s recent steps to curb forex market volatility
July 8
  • Banks barred from proprietary trading in currency futures and exchange-traded options
  • Lenders allowed to trade only on behalf of clients
July 15
  • Borrowings under capped at ~75,000 crore
  • The lending rate for MSF fixed 300 basis points above repo rate, at 10.5%
  • Open-market sale of bonds worth ~12,000 crore
July 22
  • borrowing cap further tightened to 0.5% of each bank’s deposits
  • Banks must keep daily balance of 99% of requirement

image
Business Standard
177 22

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