Govt panics, steps up effort for liquidity

Meanwhile in India, the Government stepped up efforts to ease the credit crunch, as last week's measures failed to boost liquidity, especially for Mutual Funds, who were facing severe redemption pressure in money market funds. The Finance Minister continued to swear by the inherent strength of the India growth story, and even cited a recent note by IMF's research department that had stated that the Indian economy would continue to do well despite the impact of the global liquidity crunch. He added that the root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy.

The RBI pulled up banks for not parting with loans in the wake of the global financial crisis and the tightening of domestic liquidity. The central bank also chided banks for not restructuring the dues of the SMEs, under the prudential guidelines. The RBI decided to allow banks to take trading positions in Interest Rate Futures (IRFs). The central bank decided to further tighten the prudential norms for banks’ exposure to derivative instruments. The RBI said that overdue receivables from corporates on account of mark-to-market (MTM) value of a derivative contract will be treated as a non-performing asset (NPA), if these remain unpaid for 90 days or more.

The RBI decided to conduct a special 14-day repo at 9% per annum for a notified amount of Rs200bn with a view to enabling banks to meet the liquidity requirements of Mutual Funds. The central bank also allowed banks to accept as collateral certificate of deposits (CDs) held by mutual funds for 15 days. However, banks borrowed only Rs35bn on Tuesday through the special LAF window, prompting the RBI to extend the special 14 day repo facility everyday until further notice. The money market remained stressed, forcing the RBI to slash the CRR by another 100 basis points with retrospective effect (Oct. 11).

In addition, the central bank allowed banks a further leeway of 0.5% in SLR to meet the cash requirements of mutual funds. On Sept. 16, the RBI had permitted banks to avail of additional liquidity support to the extent of up to 1% of SLR. The RBI said it will set up Special Market Operations (SMO) for public sector oil marketing companies when oil bonds become available. It also released the Rs250bn reimbursements to banks towards the farm loan waiver. The RBI also increased the interest rates on NRI deposits and FCNR (B) deposits by 0.5%.

Banks were also allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50% of their unimpaired Tier I capital as at the close of the previous quarter or US$10mn, whichever is higher, as against the existing limit of 25%. Meanwhile, capital market regulator SEBI too swung into action to stem the selloff in stock markets. It hiked the exposure margins for gross open positions in the Futures & Options segment to cut down volatility. The regulator also tightened the disclosure norms for FIIs and their sub-accounts to clamp down on 'illegal' short selling in overseas markets.

CRR cuts to bring down lending rates

Bankers on Wednesday said that lending rates may come down in response to a series of cuts by RBI in mandatory deposit requirements for banks but hastily added that a soft interest rate regime could still be some time away.

As a precursor, country's second largest PSU lender Punjab National Bank has already effected 50 basis point cut in retail loans including housing and auto loans.

Commenting on the CRR reduction, PNB Chairman and Manging Director K C Chakrabarty said, "It is a welcome step and would ease liquidity pressure. To ensure credit to the borrowers at a lower rate during the festive season we already have cut interest rate in the retail segment even before RBI announced the measure."

However, the bank has to assess the asset liability condition as well as the market rate before taking decision on further cut in interest rates, he said.

PNB today slashed interest rate on housing, educational and car loans by 50 basis points, he said.

"Our bank is the first bank to reduce interest rate on the above loans to pass the benefits to our customers on account of reduction of Cash Reserve Ratio by RBI," he said.

Once the liquidity condition eases, the logical conclusion is moderation in the interest rates, said Indian Bank Chairman and Managing Director M S Sundara Rajan.

Welcoming the move that would infuse Rs 40,000 crore in the banking system, he said, it would help in credit expansion for the productive sector.

RBI in last 10 days have announced 2.5 per cent reduction in CRR infusing liquidity to the tune of Rs 1,00,000 crore in the cash-starved banking system.

Softening in interest rates would come with a time lag. The fresh cut, however, would stabilize the rates immediately, said Oriental Bank of Commerce, Executive Director Ratnakar Hegde.

Going forward, easing liquidity condition would definitely have some impact on rates, Hegde said.

Bank of Maharashtra Chairman and Managing Director Allen C A Pereira said immediately there would not be any impact on rates. Before cutting rates banks have to re-work cost of fund as most of them have raised deposits at high cost.

Banks have to take the cost of borrowing into account while deciding about the lending rate, he said.

In one stroke, the government and RBI announced infusion of Rs 65,000 crore in the market. Out of the this, Rs 40,000 crore is being released to the bank through CRR cut of one per cent and Rs 25,000 crore would be release to financial institution by RBI under the debt waiver scheme immediately.

"RBI is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability," the apex bank said in a release.

Similar cuts announced by RBI since October 6 has injected a whopping Rs 60,000 crore and along with today's development, banks would get Rs 1,00,000 crore.

CRR Cut, Infosys Technologies, Results Preview

CRR Cut, Infosys Technologies, Results Preview

CRR Cut

CRR Cut

RBI cuts CRR rates

The Reserve Bank on Monday slashed by 0.50 per cent the rate of mandatory deposits that banks need to keep with it to ease the tight liquidity position, a move that may induce banks to lower commercial lending rates.

The new Cash Reserve Ratio (CRR) of 8.5 per cent will be effective from October 11 and would unlock about Rs 20,000 crore into the banking system, RBI said.

This is the first time in almost three years that the bank has relaxed its tight monetary policy stance that it had adopted to contain inflation.

The move, which comes in the backdrop of inflation easing below 12 per cent and outflow of foreign capital, is aimed at infusing more funds in the financial system.