RBI steps in to prevent the Rupee Slide
By Vaibhav Aggarwal
Sep 19, 2008
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The Reserve Bank of India(RBI) has come out with a series of moves aimed at defending the rupee from further depreciation and easing the tight short-term liquidity situation in the banking system.

In its move to meet the liquidity requirements of the economy, the Central Bank has reduced the statutory liquidity ratio (SLR).

SLR is the amount which a commercial bank has to maintain in the form of cash, gold or approved securities with RBI. The quantum is specified as some percentage of the total demand and time liabilities of the bank. Presently the banks are required to keep only 25% of their liabilities in the form of SLR securities.

In addition to the normal method of borrowing funds, RBI will also allow banks to acquire additional liquidity up to one percent of their deposits and seek waiver of penal interest.

At present, the Reserve Bank of India operates a Liquidity Adjustment Facility (LAF) to inject/absorb liquidity through daily repos/reverse repos auctions.

The second liquidity adjustment facility (SLAF) was introduced to inject more liquidity in system on every reporting Friday (every week). SLAF will now open up daily to pump more liquidity in the current scenario. Liquidity in the banking system has tightened considerably after the August 30 cash reserve ratio hike.

The ongoing global market crisis, fear of portfolio outflows and increasing dollar demand led to a sharp slide in the rupee dollar exchange rate in recent weeks. Until now, the RBI has resorted to indirect measures of supporting the rupee but now it has decided to intervene to support further depreciation of the rupee from Rs 46. RBI decided to increase the supply directly or through its bank agents.

The interest rates hikes on non-resident deposits by 50 basis points also seem to be a move to stimulate inward remittances and shield the rupee. The Bank is also considering the option of relaxing the cap on external commercial borrowings.

The recent extraordinary global developments triggered by the bankruptcy Lehman Brothers have resulted in severe disruptions of international money markets, sharp declines in stock markets across the globe and extreme investor aversion. Therefore, these steps by RBI are targeted to ensure financial stability in the economy.

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