The Hindu Business Line : RBI cuts cash reserve ratio yet again

Injecting funds
RBI has also allowed a temporary relaxation in statutory liquidity ratio to the extent of 0.5 per cent of banks’ net time and demand liabilities
Banks allowed to borrow funds from their overseas branches and correspondent banks, up to a limit of 50 per cent of their unimpaired Tier-I capital

Our Bureau

Mumbai, Oct. 15 The Reserve Bank of India on Wednesday announced a host of measures including a one percentage point reduction in Cash Reserve Ratio (CRR) to infuse more money into the liquidity-starved economy.

The RBI steps, followed by another set of measures by the Finance Minister, came after the Sensex fell 674 points during the day.

The first set of measures announced by the regulators earlier, including removal of restrictions on P-notes and a CRR cut, failed to enthuse the market which saw continued selling by FIIs.

The cut in CRR, the second in the past one week, will release another Rs 40,000 crore to banks. With this, the additional funds made available to banks stands at Rs 100,000 crore. Last week, RBI had announced a 150 basis points reduction in CRR. Both CRR revisions will be effective from the fortnight beginning October 11.

CRR, the portion of deposits banks have to keep with RBI, has now been reduced from 7.5 per cent to 6.5 per cent.

In addition to the CRR cut, RBI has also allowed a temporary relaxation in Statutory Liquidity Ratio (SLR) to the extent of 0.5 per cent of banks’ net time and demand liabilities. This flexibility was granted to enable banks to borrow the Rs 20,000 crore of additional facility, to on lend to mutual funds facing redemption pressures. The facility was allowed through a special 14-day repo window. The special repo facility offered from Tuesday fetched lukewarm response from banks as they do not have enough SLR securities to pledge with RBI.

“It has been decided, purely as a temporary measure, that banks may avail themselves of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL),” RBI said in a statement.

This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on Tuesday. The RBI has also permitted banks to offer higher interest rates on foreign currency and NRE term deposits.

Currently, the interest rate ceiling on FCNR (B) deposits is Libor minus 25 basis points. Now the ceiling has been increased by 50 basis points, which is Libor plus 25 basis points.

On NRE deposits, the interest rate ceiling has been increased to Libor plus 100 basis points, from the current ceiling of Libor plus 50 basis points.

RBI has also allowed banks to borrow funds from their overseas branches and correspondent banks, up to a limit of 50 per cent of their unimpaired Tier-I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.

Sensex down 674 points

Equity markets came under immense pressure following heavy FIIs selling on Wednesday, leading to a more than five per cent drop in the Sensex and the Nifty.

FIIs were net sellers of equities for Rs 1,030 crore, data provided by the custodians to the exchanges indicated.

Domestic institutional investors were net buyers for Rs 670 crore.

The Sensex closed below the 11,000 levels at 10,809, down by 674 points over the day. The Nifty closed at 3,338, losing 180 points.