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RBI does it all... - Views on News from Equitymaster
 
 
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  • Nov 1, 2008

    RBI does it all...

    Having resolved to employ both conventional and unconventional measures to guard the economy against the early signs of an 'evident global recession', the Reserve Bank Of India (RBI) today opened its purse to allow Indian banks access to sufficient liquidity, at cheaper rates.

    What is particularly worth noting here is that, besides its usual tools of monetary policy, i.e. the CRR and the repo rate, the central bank has also used the SLR rate and a special refinance facility to offer banks sufficient short term liquidity. Meanwhile, it has expressed some satisfaction over the inflation (measured in terms of wholesale price index, WPI) coming down to 10.7% levels and global commodity prices, including that of crude oil, cooling off. However, the RBI has also reasoned that the global financial turmoil has had unforeseen effects on domestic financial markets; and reinforced the importance of focusing on preserving financial stability. It has taken the following steps in this regard.

    • Reduced the CRR (cash reserve ratio) by 1% to 5.5%, in two stages. This alone will infuse liquidity to the tune of Rs 400 bn into the system. It may be recalled that the RBI had already reduced the CRR by 2.5% in the month of October 2008.

    • Reduced the repo rate by 0.5% to 7.5%. The repo rate was also tweaked with and cut by 1% in October.

    • Reduced the SLR by 1% to 24%. This will allow banks to liquidate some of the investments kept under the SLR requirement. The RBI has, however, specified that the relaxation in SLR is to be used exclusively for the purpose of meeting the funding requirements of NBFCs and mutual funds.

    • In order to provide further comfort on liquidity to banks the RBI has introduced a special refinance facility wherein the banks can borrow from the RBI up to 1% of each bank's net demand and time liabilities (deposits) as on October 24, 2008, at the repo rate, for a maximum period of 90 days.

    These measures indicate that the RBI continues to closely monitor the developments in the global and domestic financial markets and take timely and appropriate steps to maintain stability. Also, domestic banks will certainly draw some comfort from these measures in the short to medium term, which will enable them to lend to productive sectors as well as protect their margins.

     

     

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