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BL Research Bureau The Finance Minister on Wednesday announced measures to improve the liquidity in the system and to make sure that credit will continue to flow, to meet the short-term (working capital) and long-term (term loan) needs of companies.

The RBI has furthered this cause by announcing 100 basis points cut in cash reserve ratio, a move which is expected to infuse around Rs 40,000 crore into the system. The easing of statutory liquidity ratio by additional 50 basis points will enable banks to borrow additional Rs 20,000 crore.

The raising of the cap on FII investments in Indian debt from $3 billion to $6 billion may aid flows into the corporate debt market; given that interest rate differentials are still significant between India and other global markets. This may be positive for the rupee and aid corporate borrowings, with equity market conditions not being favourable for fund raising.

The measures also include a proposed release of Rs 25,000 crore towards the farm loan debt waiver with immediate effect. Scheduled commercial banks will get Rs 7,500 crore of this.

The sum of Rs 7,500 crore will not create any significant surplus of liquidity, nevertheless is a relief on much waited funding of the farm loan waivers for the PSU banks.

Listed banks may also be beneficiaries of the Government’s proposed capitalisation scheme, through which it will finance the capital adequacy (CRAR) requirements of the banks.

Though most of the banks have CRAR of more than the RBI-stipulated 9 per cent, the Finance Minister has indicated that the Government is looking at various alternatives to help banks with CRAR ratios of 10 to 12 per cent raise capital, so that the ratio is at a comfortable level.

Among PSU banks, Bank of Maharashtra, Central Bank of India, Dena Bank, Vijaya Bank, UCO Bank had CRARs of less than 12 per cent as of March 2008.

RBI’s cut in cash reserve ratio to 6.5 per cent with retrospective effect should ease the liquidity crunch perceived by the market.

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