RBI steps in to ease liquidity pressure

RBI steps in to ease liquidity pressure

Our Banking Bureau / Mumbai March 29, 2006

Amid mounting pressure for a cut in banks' cash reserve ratio (CRR), the Reserve Bank of India today took yet another step to ease liquidity in the financial system.

The central bank hiked the interest rate ceiling on foreign currency non-resident bank (FCNR-B) deposits by a quarter percentage point.

Ahead of its annual monetary policy on April 18, the RBI has already managed to ease the pressure on liquidity by continuously sterilising the dollar inflow.

Over the last six weeks, it has bought about $6 billion from the foreign exchange market and released over Rs 25,000 crore into the system. The foreign exchange reserves, which were $140.429 billion on February 10, rose to $146.159 billion on March 18.

This, coupled with unwinding of the market stabilisation scheme (MSS), has brought down the overnight call rate from its three-and-a-half-year high of 8 per cent last month to less than 6 per cent today.

As a tell-tale sign of liquidity easing, the RBI today mopped up Rs 4,745 crore through the reverse repo while there was no taker for funds at the repo window.

The central bank infuses funds into the system through the repo window at 6.5 per cent and absorbs liquidity through the reverse route at 5.5 per cent. The average daily injection of funds through the repo facility last month was over Rs 15,000 crore. It came down to about Rs 2,000 crore in mid-March. Increased government spending would ease the situation further, analysts said.

Hours after RBI Governor YV Reddy