The Hindu Business Line : RBI moves in to ease pressure on markets

Mumbai, Sept 16 As a response to the developments in the global financial markets, the Reserve Bank of India has announced a series of measures aimed at increasing liquidity and attracting foreign currency.

In a notice issued on Tuesday, the RBI said that global developments triggered by the bankruptcy or sell-out of some of the world’s largest financial institutions had resulted in severe disruptions of international money markets, sharp declines in stock markets across the globe and severe investor aversion.

“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,” the RBI said.

The measures include direct RBI participation in the foreign exchange market, additional liquidity injection and increase in the FCNR and NRE term deposit rates.

The RBI said it will continue to sell dollars in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps.

“All transactions by the RBI will be at the prevailing market rates and according to market practice,” said the RBI.

The interest rate ceiling on FCNR (B) deposits, for all maturities, has been increased by 50 basis points, i.e. Libor minus 25 basis points, as against the prevailing Libor minus 75 basis points. The interest rate ceiling on NR(E)RA deposits for one to three years maturity has been increased by 50 basis points, i.e. Libor plus 50 basis points.

Currently, the interest rate ceiling does not exceed Libor rates for the US dollar of corresponding maturity.

Banks will also be allowed, on a temporary basis, to avail additional support under the liquidity adjustment facility (LAF) up to one per cent of their net demand and time liabilities and seek waiver of penal interest.

This is over and above the amounts banks can borrow, at present, against the collateral of eligible securities that are in excess of their prescribed statutory liquidity ratio.

The RBI has also decided to conduct the second liquidity adjustment facility (SLAF) every day in a response to the prevailing liquidity conditions.