RBI puts further curbs on banks to tighten liquidity

Unrelenting in its efforts to quell speculation in the foreign exchange market, the Reserve Bank of India (RBI), on Tuesday, imposed further curbs on banks with a view to draining liquidity from the system.

The central bank has told banks to necessarily maintain a minimum daily balance of 99 per cent of the CRR (cash reserve ratio) requirement, up from 70 per cent currently.

The RBI has also prescribed individual limits for banks to access the Liquidity Adjustment Facility (LAF), a monetary policy tool. LAF allows banks to borrow money from the RBI by selling their securities through repurchase agreements. LAF is mainly intended to help banks adjust any mismatch in daily liquidity.

Further fine-tuning its policy change in this regard announced on July 15, the RBI has said that each bank would be allowed access to LAF up to 0.5 per cent of its own net demand and time liabilities (NDTL) outstanding on the last Friday of the reporting cycle two weeks prior to the current one.

On July 15, the RBI said that the overall allocation of funds under the LAF would be limited to 1.0 per cent of the NDTL of the banking system, reckoned to be around Rs. 75,000 crore. Allocations to individual banks, however, were made in proportion to their bids, subject to the overall ceiling.

Coming just a week after the RBI raised the short-term borrowing rates for banks to 10.25 per cent, the twin measures on Tuesday evening are bound to have repercussions on the cost of funds.

Though banks have guardedly restrained themselves from increasing the lending rates, the latest RBI action will put fresh pressures on banks. Already, the bench-mark 10-year bond yield has risen following increase in short-term borrowing rates. The latest measures, sources, said would make borrowers edgy, and push up borrowing costs for the government as well.

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Printable version | Sep 25, 2022 9:31:06 am |