The Reserve Bank of India (RBI) stepped in this evening to check any potential adverse impact of the global financial turmoil on the Indian markets by announcing measures to ease the liquidity crunch and bolster the weakening rupee.
Tomorrow onwards, as an ad-hoc liquidity-injecting measure, the central bank will allow banks in dire need of funds to borrow more by relaxing the statutory liquidity ratio (SLR), or the amount banks must mandatorily invest in government securities.
| RBI’S MARKET MEASURES |
Banks are currently required to keep 25 per cent of their liabilities as SLR securities but RBI today has permitted a one percentage point relaxation by allowing banks to access funds under the liquidity adjustment facility (LAF). Banks have also been allowed to seek a waiver from paying penal interest for missing the 25 per cent SLR norm.
RBI has also said it would conduct a second LAF operation on a daily basis to manage liquidity. This facility was earlier available only on reporting Fridays.
Meanwhile, the central bank made it clear that it would continue to sell dollars either directly or through banks at prevailing market rates to check further depreciation. The rupee fell for the sixth day in a row, closing at 46.93, against the dollar, compared with the previous close of 46.06.
The central bank has raised the ceiling on interest rates on non-resident deposits by 50 basis points to encourage the inflow of foreign currency deposits and strengthen the rupee.
RBI announced the measures while pointing to various actions by central banks and regulators across the world following the bankruptcy petition filed by Lehman Brothers and the cash crunch being faced by American International Group, the largest US insurer.
“These developments have also brought some pressures to bear on the domestic money and forex markets, in conjunction with temporary local factors such as advance tax outflows,” RBI said in a statement this evening.
The moves may also have been prompted by a rise in call rates to 16 per cent from 12 per cent yesterday, on account of an outflow of over Rs 35,000 crore for the second instalment of advance tax. The tight liquidity situation could also be seen from the fact that banks borrowed over Rs 57,500 crore through LAF.
“Banks have been heavy borrowers today. The idea is to send positive signals to the market when there are strong disorderly conditions in the international markets, the forex markets and money markets,” said the treasury head of a large public sector bank.