The Hindu Business Line : Are Govt moves a futile exercise?

Chennai, Oct. 24 The Government, in coordination with SEBI and Reserve Bank of India, has announced a slew of measures to calm market sentiment amid global turmoil and improve domestic liquidity. But it seems those measures turned out to be futile as the Sensex tumbled below the 9000-mark for the first time in three years.

On September 16, the RBI came out with measures that include allowing banks to participate in foreign exchange market and also hiked the term deposit rates in Foreign Currency Non-Resident Deposit and Non-Resident External Account.

On September 22, the Finance Ministry raised overseas borrowing caps for infrastructure companies for rupee expenditure from $100 million to $500 million. Borrowings in excess of $100 million must have a minimum average maturity of 7 years.

PN story

On October 6, SEBI lifted the October 2007 restrictions on issue of participatory notes (PNs) by foreign institutional investors (FIIs) to arrest the outflow of FII funds. FIIs were allowed to issue PNs against securities, including derivatives, as underlying assets. The PNs limit of 40 per cent of an FII’s total assets under custody was also done away with.

The RBI announced a 50-basis-point cut in the cash reserve ratio – proportion of deposits banks need to keep with the central bank – to 8.5 per cent, effective October 11. The move was expected to infuse Rs 20,000 crore into the system.

Easing borrowings

On October 7, the Union Finance Ministry expanded definition of infrastructure companies to include mining, exploration and refining companies for external commercial borrowing purposes. Companies engaged in mining, exploration and refining activities were then allowed to borrow up to $500 million a year from abroad, 10 times more than the $50 million allowed earlier.

On October 10, the RBI once again reduced CRR by 100 basis points to 7.5 per cent to release another Rs 60,000 crore into the system.

On October 14, the RBI announced measures to infuse Rs 20,000 crore through a special lending route for mutual funds to meet their liquidity needs and redemption pressure. As per the scheme, banks were allowed to borrow for 14 days at 9 per cent interest per annum. In turn, they were to lend to mutual funds against their holdings of certificate of deposits in public sector banks.

On October 15, the RBI reduced CRR by another 100 basis points to 6.5 per cent to release Rs 40,000 crore into the banking system. This is the steepest-ever triple CRR cut in two weeks. In July 1974, CRR was slashed 200 basis points to 5 per cent.

On October 20, the RBI cut repo (repurchase) rate by 100 basis points to 8 per cent. This is the first repo cut since 2004.

On October 20, SEBI said that it was not in favour of lending and borrowing of securities by FIIs overseas through PNs. In a statement on its Web site, SEBI also said that it was monitoring the lending and borrowing activities of FIls and that it would take stronger measures to halt short selling in equities through PNs.

Overseas Borrowing

On October 22, the RBI after market hours raised the ceiling on overseas borrowing by domestic firms to $500 million from $100 million, a move aimed at boosting capital inflows and shoring up the rupee after it hit record lows. A central bank statement posted on its Web site said companies can use the new facility without its approval for rupee or foreign currency spending.

The changes to the borrowing rules will take effect immediately. It also scrapped a rule that required loans above $100 million for infrastructure spending to have a minimum maturity of seven years.

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