RBI cuts CRR by 100 basis points to improve domestic liquidity

The Reserve Bank of India has been continuously monitoring the liquidity and monetary conditions in the recent period. A host of measures have already been taken over the last one month to ensure that there is adequate liquidity in the system.

The Indian interbank unsecured money market has been functioning normally. Average daily volumes in the overnight call money market, at about Rs.14,000 crore in October 2008 have in fact been somewhat higher than those observed in the previous six month period. However, the continuing uncertain global situation is having an indirect impact on our financial markets. On a further review, the RBI has decided to institute the following measures:

(i) The cash reserve ratio (CRR) of scheduled banks is currently at 7.5 per cent of their net demand and time liabilities (NDTL). On a review of the evolving liquidity situation, it has been decided to reduce the CRR by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of Rs.40,000 crore.

(ii) On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 per cent per annum for a notified amount of Rs.20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Rs.3,500 crore of this facility was utilised by banks yesterday. Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice upto a cumulative amount of Rs.20,000 crore for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR). It has been decided, purely as a temporary measure, that banks may avail 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 NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.

Source : Equity Bulls

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