The Reserve Bank of India (RBI) freed up another Rs 40,000 crore of liquidity in the banking system by reducing the cash reserve ratio (CRR) — the share of deposits kept with the central bank — by one more percentage point to 6.5 per cent, less than a week after a 1.5 percentage point cut.
As reported in Hindustan Times on Wednesday, the RBI also made deposit rates more attractive for non-resident Indians (NRIs) to attract funds that could stabilise the rupee and boost resources to give loans.
The latest cut is also effective retrospectively from October 11, the day the earlier cut that released Rs. 50,000 crore. The measures are part of quick efforts to assuage banks that were nervous amid a pumping out of cash by RBI to stabilise the rupee, amid a global financial crisis.
Saugata Bhattacharya, vice president, Axis Bank said, “This is a positive move, banks required this liquidity to meet the genuine credit needs of the corporates.” Short term interest rates would stabilise soon, he added. However he also said that the financial instability in the global markets will put pressure again if more global capital moved out of India.
The RBI also allowed banks an additional facility up to the extent of 0.5 per cent of deposits, for onward lending to mutual funds.
This facility is purely a temporary measure and will terminate 14 days after RBI’s Rs 20,000 crore special liquidity facility meant for mutual funds expires on October 28.
This effectively means banks’ investments in government securities to meet the statutory liquidity ratio (SLR) stands reduced further to 23.5 per cent.
RBI raise the interest rate ceiling on foreign currency non-resident (FCNR) deposits by 50 basis points to 0.25 percentage point above benchmark Libor/Euribor/Swap rates. One percentage point equals 100 basis points.
Interest rate ceiling on non-resident (external) rupee account deposits has been raised by 50 basis points to Libor/Eurobor/Swap rates plus 100 basis points.
Banks have also been 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 as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.