Special Correspondent

Market regulator disapproves overseas lending by FIIs

MUMBAI: The Reserve Bank of India on Monday reduced the repo rate — a short term indicative lending rate under the Liquidity Adjustment Facility (LAF) — by 100 basis points to eight per cent with immediate effect, “in order to alleviate the pressures and, in particular, to maintain financial stability.”

The repo rate is the rate at which banks borrow from the central bank. The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicentre of the crisis. “India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks,” the RBI stated in a press release on Monday.

Global crisis

The RBI has taken a number of measures over the last one month to augment domestic and forex liquidity.

The RBI has been and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate, it added. Meanwhile, the Securities and Exchange Board of India on Monday disapproved overseas lending and borrowing activity of foreign institutional investors (FIIs). The market regulator stated that “SEBI disapproves of the overseas lending and borrowing activity of FIIs and the consequent selling pressure in the cash market in India. SEBI has communicated its disapproval to the FIIs. The lending borrowing activity of FIIs is being monitored and if necessary stronger measures will be taken by SEBI as considered appropriate,” it added. SEBI further stated that it has been reviewing the data submitted by (FIIs) with regard to their stock lending activities abroad. On the domestic stock lending mechanism, SEBI stated that, it finds that this facility has not been used by the institutions while the stock lending mechanism has been made operational in the Indian market. “SEBI is reviewing the difficulties in the use of the lending borrowing facility and would be taking steps to make this mechanism more effective.”