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RBI cuts CRR further by 100 basis points

D. Subbarao

MUMBAI: In a major move to pump in liquidity into the system the Reserve Bank of India on Wednesday announced a slew of measures, including reducing the Cash Reserve Ratio (CRR) by 100 basis points, which will release additional Rs. 40,000 crore.

Last week the RBI reduced the CRR — a portion of deposits banks have to set aside as reserve — by 150 basis points with effective October 11, which already released an amount of Rs. 60,000 crore into the system. With the latest cut in CRR to 6.5 per cent, the central bank injected a total of Rs. 1,00,000 crore into the financial markets with effect from the current reporting fortnight that began on October 11.

Further, the RBI decided to provide Rs. 25,000 crore to banks as the first instalment under the Agricultural Debt Waiver and Debt Relief scheme of the Government. It also raised the interest rates ceiling on non-resident Indian (NRI) deposits to attract foreign currency funds to the country.

At present, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor or Euribor or Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies.

The present interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor or Euribor or Swap rates plus 50 basis points for the U.S. dollar of corresponding maturity. Further, banks will be 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.

However, the RBI stated that these measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.

Earlier in the day, the RBI decided to conduct special fixed rate term repo at 9 per cent annually against eligible securities for a notified amount of Rs. 20,000 crore on a daily basis to provide liquidity requirements of mutual funds.

“Banks utilised Rs. 3,500 crore of this facility on October 14,” the RBI stated. “The special fixed rate term repo under the liquidity adjustment facility will now be conducted every day until further notice up to a cumulative amount of Rs. 20,000 crore for the same purpose. Accordingly, the residual amount will be notified every day till further notice,” the RBI stated in a notification to commercial banks and primary dealers. Repo is a facility under which the banks borrow from the RBI and the reverse repo is the facility under which banks park their funds with the RBI. The RBI stated that it is monitoring developments in the financial markets closely and would respond swiftly to any adverse external developments.