Nearly a week after the Reserve Bank of India slashed Cash Reserve Ratio (CRR)- the amount that banks park with the central bank- by 150 bps in two successive moves to release Rs.80, 000 crore for credit, the RBI on Wednesday further cut CRR by 100 bps to 6.5% with effect from October 11. The move to contain liquidity will infuse Rs 40,000 crore into the system.
The RBI also released Rs. 25,000 crore (Rs.7,500 crore to commercial banks and Rs17,500 crore to Nabard) for lending institutions for credit to funds-starved industry. These amounts will help banks in providing agricultural debt waiver and relief scheme.
On Tuesday, RBI also kept open an additional Rs 20,000 crore credit-window for banks to meet liquidity needs of mutual fund industry, which were facing redemption pressure because of increase in withdrawal demand by the depositors considering financial crisis.
This window, which was initially on offer for Tuesday alone, had to be extended since just Rs 3,500 crore were sought by banks on the opening day. On Wednesday too, only a single bank asked for mere Rs 200 crore.
The RBI and the government acting together to solidify confidence in the banking sector announced some major measures yesterday with the aim of providing cash to needy banks and attracting deposits from the non-resident Indian community.
RBI also announced that it would sell Rs 10,000 crore of two dated securities on Monday, October 20.
With the sole purpose of enhancing liquidity in the system and to get money flowing through squeezed markets, the Finance Minister P Chidambaram raised the cap on foreign investment in corporate debt to $6 billion from the current $3 billion.
The experts though feel the move would barely impact since foreign institutions are still pulling out money from emerging markets. The move will bear fruit in due course of time, provided higher interest rate.
RBI took other measures to attract NRI and FII funds as it raised the interest rate on foreign currency deposits by NRIs--FCNR (B) and NR(E)RA accounts—by half a percentage point. This could enhance dollars inflow to banks leading to save rupee from further decline.
The finance ministry has also promised direct funding for banks, which have less than 12% capital. Under current norms, banks require a minimum of 9% of capital against advances and no bank has less then 10%.
RBI’s measures have instilled considerable additional liquidity into the market, the Finance Minister said, adding, "The central bank will enable smooth flow of credit for term loans and working capital."
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