Govt, RBI set to ease liquidity

In a move to boost liquidity, the government and the Reserve Bank of India are considering a special window to enable banks with farm loan relief scheme arrears, a major factor impacting liquidity, to raise funds. The move will help inject liquidity into the system till Parliament approves the Rs 25,000-crore reimbursement.

Banks may also be asked to extend credit of Rs 7,000-8,000 crore to mutual funds that face heavy redemptions. Sources said the government and regulators feared that two or three asset management companies may face such pressures. Details of how the funds will be made available could not be ascertained.

Sources close to the development said these moves are being discussed along with the use of other monetary policy instruments like the Statutory Liquidity Ratio (SLR), the amount banks must invest in government securities, cash reserve ratio (CRR), the proportion of deposits banks must keep with the central bank, and external commercial borrowings.

Meanwhile, in a letter to bank chiefs this evening, RBI also asked banks to ensure that adequate credit flow is available to the small and medium enterprises.

RBI has already lowered the CRR 150 basis points, which has released Rs 60,000 crore into the system. Banks in dire need of capital have been allowed to reduce the level of the SLR ratio from the prescribed 25 per cent level by roughly a percentage point

The central bank also has the option to reduce the repo rate, or the rate at which the central bank lends short-term money to banks against government securities, but that will signal a reduction in the interest rate environment. Various options were discussed by the committee on liquidity enhancement headed by Finance Secretary Arun Ramanathan today.

“Liquidity has eased slightly after the CRR cut but it is not comfortable. More steps are required and more steps may come from RBI,” Bank of India Chairman & Managing Director T S Narayanasamy, who is also a member of the committee, told reporters after the meeting that lasted nearly two hours. The panel is scheduled to meet again in Mumbai on Wednesday.

Liquidity eased today with the call rate, according to Clearing Corporation of India data, touching a high of 10.05 per cent On Friday, the rate had touched a high of 23 per cent. Bank borrowing from RBI through the repo route on a net basis also eased to Rs 55,440 crore today against over Rs 91,000 crore on Friday.