Kochhar Business Services (KBS) is the Exclusive Overseas SME Export Coordinator, 2011 for JETRO (Japan External Trade Organization), India
Monthly News

Liquidity, confidence booster for markets

Acting in concert, the finance ministry, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) unveiled a string of measures on Wednesday to increase liquidity in the system and boost investor confidence.

Bankers, however, say that even these may not be enough to ease the liquidity crunch in the system and boost investor confidence.

The measures announced included a 100 basis points reduction by RBI in the cash reserve ratio (CRR) that determines the cash balance banks need to keep with the central bank, with retrospective effect from Saturday, 11 October.

With this, RBI has cut CRR by an unprecedented 250 basis points to 6.5% in one shot, freeing up Rs1 trillion. One basis point is one-hundredth of a percentage point.

The banking regulator also announced additional liquidity support for mutual funds (MFs) by allowing banks to keep 23.5% of their deposits in government bonds. Although RBI dubbed it as a “purely temporary measure”, the move amounts to a cut in banks’ statutory liquidity ratio (SLR).

Under Indian banking laws, banks are currently required to invest 25% of their deposits in government bonds in the form of SLR. They use the excess investment in such bonds as collateral to get funds from RBI.

This means that if a bank does not have excess SLR investments, it cannot avail RBI funds. On 16 September, RBI had brought down the requirement to 24% and on Wednesday, 23.5%. Banks will use the headroom to borrow money from RBI for MFs that are facing redemption pressure.


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