rbi cuts crr, slr, repo; lending and deposit rates to

8/14/2019 RBI Cuts CRR, SLR, Repo; Lending and Deposit Rates To

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RBI cuts CRR, SLR, repo; lending and deposit rates to fall

Mumbai (PTI): Home, consumer and corporate loan rates are likely to ease in the near future, with the RBI on Saturday announcing a slew of monetary measures.

The RBI provided the following details in a press release:

In its Mid-Term Review of the Annual Policy Statement for 2008-09, the Reserve Bank of India indicated that in the context of the uncertain and unsettled global situation and itsindirect impact on our domestic economy and our financial markets, it would closely andcontinuously monitor the situation and respond swiftly and effectively to developments.In doing so, the Reserve Bank will employ both conventional and unconventionalmeasures. Global financial conditions continue to remain uncertain and unsettled, andearly signs of a global recession are becoming evident. These developments are beingreflected in sharp declines in stock markets across the world and heightened volatility incurrency movements. International money markets are yet to regain calm and confidenceand return to normal functioning.

It was also indicated in the Mid-Term Review that the current challenge for the conductof monetary policy is to strike an optimal balance between preserving financial stability,maintaining price stability and sustaining the growth momentum. Inflation, in terms of the wholesale price index (WPI), has been softening steadily since August 9, 2008 andhas declined to 10.68 per cent for the week ended October 18, 2008. Globally, pressuresfrom commodity prices, including crude, appear to be abating. The moderation in keyglobal commodity prices, if sustained, would further reduce inflationary pressures. On thegrowth front, it is important to ensure that credit requirements for productive purposes areadequately met so as to support the growth momentum of the economy. Domesticfinancial markets have been functioning normally. Prudent regulatory surveillance and

effective supervision have ensured that our financial sector has been and continues to berobust. However, the global financial turmoil has had knock-on effects on our financialmarkets; this has reinforced the importance of focusing on preserving financial stability,

The Reserve Bank has reviewed the current and evolving macroeconomic situation andliquidity conditions in the global and domestic financial markets. Based on this review, ithas decided to take the following further measures:

(i) On October 20, 2008, the Reserve Bank announced a reduction in the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points from 9.0 to 8.0 per cent. Inview of the ebbing of upside inflation risks as also to address concerns relating to themoderation in the growth momentum, it has been decided to reduce the repo rate under the LAF by 50 basis points to 7.5 per cent with effect from November 3, 2008.

(ii) The cash reserve ratio (CRR) of scheduled banks is reduced by 100 basis points from6.5 per cent to 5.5 per cent of net demand and time liabilities (NDTL). This will beeffected in two stages: by 50 basis points retrospectively with effect from the fortnight beginning October 25, and by a further 50 basis points prospectively with effect from thefortnight beginning November 8, 2008. This measure is expected to release aroundRs.40,000 crore into the system.



(iii) On September 16, 2008, the Reserve Bank had announced, as a temporary and adhoc measure, that scheduled banks could avail additional liquidity support under the LAFto the extent of up to one per cent of their NDTL and seek waiver of penal interest. It hasnow been decided to make this reduction permanent. Accordingly, the Statutory LiquidityRatio (SLR) will stand reduced to 24 per cent of NDTL with effect from the fortnight

beginning November 8, 2008.

(iv) In order to provide further comfort on liquidity and to impart flexibility in liquiditymanagement to banks, it has been decided to introduce a special refinance facility under Section 17(3B) of the Reserve bank of India Act, 1934. Under this facility, all scheduledcommercial banks (excluding RRBs) will be provided refinance from the Reserve Bank equivalent to up to 1.0 per cent of each bank's NDTL as on October 24, 2008 at the LAFrepo rate up to a maximum period of 90 days. During this period, refinance can beflexibly drawn and repaid.

(v) On October 15, 2008 the Reserve Bank announced, purely as a temporary measure,that banks may avail of additional liquidity support exclusively for the purpose of

meeting the liquidity requirements of mutual funds (MFs) to the extent of up to 0.5 per cent of their NDTL. A similar facility of liquidity support for non-banking financialcompanies (NBFCs) is also found to be necessary to enable them to manage their fundingrequirements. Accordingly, it has now been decided, on a purely temporary and ad hoc basis, subject to review, to extend this facility and allow banks to avail liquidity supportunder the LAF through relaxation in the maintenance of SLR to the extent of up to 1.5 per cent of their NDTL. This relaxation in SLR is to be used exclusively for the purposeof meeting the funding requirements of NBFCs and MFs. Banks can apportion the totalaccommodation allowed above between MFs and NBFCs flexibly as per their businessneeds.

(vi) As indicated in the Reserve Bank's press release of September 16, 2008, as on some previous occasions, the Reserve Bank will continue to sell foreign exchange (US dollar)through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps. The Reserve Bank would either sellthe foreign exchange directly or advise the bank concerned to buy it in the market. All thetransactions by the Reserve Bank will be at the prevailing market rates and as per market practice. Entities with bulk forex requirements can approach the Reserve Bank throughtheir banks for this purpose.

(vii) It has been decided, as a temporary measure, to permit Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFCs-ND-SI) to raise short- termforeign currency borrowings under the approval route, subject to their complying with the prudential norms on capital adequacy and exposure norms. Details in this regard have been notified separately and are available on the Reserve Bank's web site.

(viii) Under the Market Stabilisation Scheme (MSS), Government Securities (treasury bills and dated securities) have been issued to sterilise the expansionary effects of forexinflows. In the context of forex outflows in the recent period, it has been decided toconduct buy-back of MSS dated securities so as to provide another avenue for injectingliquidity of a more durable nature into the system. This will be calibrated with the market



borrowing programme of the Government of India. The securities proposed to be bought back and the timing and modalities of these operations are being notified separately.

The Reserve Bank will continue to closely monitor the developments in the global anddomestic financial markets and will take swift and effective action as appropriate.

Example 1

An investor sells a call option, where the buyer has the right to buy 100 shares inUniversal Widgets S.A. at 90¢. He receives an option premium of 14¢. The value of the option is 14¢, so this is the premium margin. The exchange has calculated, usinghistorical prices, that the option value won't go above 17¢ the next day, with 99%

certainty. Therefore, the additional margin requirement is set at 3¢, and the investor has to post at least 14¢ + 3¢ = 17¢ in his margin account as collateral.

Example 2

Futures contracts on sweet crude oil closed the day at $65. The exchange sets theadditional margin requirement at $2, which the holder of a long position pays ascollateral in his margin account. A day later, the futures close at $66. The exchangenow pays the profit of $1 in the mark-to-market to the holder. The margin accountstill holds only the $2.

Example 3

An investor is long 50 shares in Universal Widgets Ltd, trading at 120 pence (£1.20)each. The broker sets an additional margin requirement of 20 pence per share, so £10for the total position. The current liquidating margin is currently £60 in favour of the

investor . The minimum margin requirement is now -(!)£60 + £10 = -£50. In other words, the investor can run a deficit of £50 in his margin account and still fulfil hismargin obligations. This is the same as saying he can borrow up to £50 from the broker

Sumit

What is CRR?

Indian banks are required to hold a certain proportion of their deposits as cash. In realitythey don’t hold these as cash with themselves, but with Reserve Bank of India (RBI),which is as good as holding cash. This ratio (what part of the total deposits is to be heldas cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold

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Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend. The RBI’s medium term policy is to take the CRR rate down to 3 per cent.

What does a hike in this rate mean?

The hike in CRR from 4.5 to 5 per cent will increase the amount that banks have to holdwith RBI. It will therefore reduce the amount that they can lend out. The move isexpected to shift Rs 8,000 crore of lendable resources to RBI. In the past few months themoney that banks have available for giving out as credit is greater than the amount theyhave been lending out. This has led to “an overhang of liquidity” in the system. Theobjective of the CRR hike is to “mop up” some of the “excess liquidity” in the system

rbi cuts crr, slr, repo; lending and deposit rates to

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