RBI restores SLR to 25%

Beginning the end of its accommodative monetary policy, the Reserve Bank of India (RBI) today restored the statutory liquidity ratio (SLR) to 25 per cent from 24 per cent and closed the special financing window set up for mutual funds and home finance companies.

It also discontinued the foreign exchange swap facility of banks. The brought down the limit of export credit refinance facility to 15 per cent. This was earlier increased to 50 per cent.

RBI, as part of steps to deal with effects of the global financial crisis in 2008, had put in refinance facilities to ensure financial sector players had access to funds.

The utilisation of these facilities had been low, RBI said in its second-quarter monetary policy review.

Rating agency CARE said the review revealed a slow calibrated exit from the accommodative monetary policy stance amid a maintained market environment. However, given that the economic recovery was fragile, any premature monetary tightening would hurt the growth process, it said.

RBI has chosen to begin the ‘exit’ process with the closure of some unconventional measures.

The SLR was reduced to 24 per cent in November 2008. Banks have to invest 25 per cent of their demand and time deposits in government bonds to ensure they have a buffer to deal with unforeseen circumstances. This will moderately help in accommodating the government’s borrowing plans in a non-disruptive way. This also allows for a greater government spending without widening the fiscal deficit.

On liquidity facilities, RBI said it would close the special refinance facility for scheduled commercial banks and discontinue the special term repo facility for scheduled commercial banks for funding to mutual funds, non-banking financial companies and housing finance companies.

It, however, it will continue to operate refinance facility for SIDBI, NHB and EXIM Bank till March 31, 2010. However, these three financial institutions (FIIs) will have to ensure that outstandings are repaid March 2010.