Fearing a deeper crunch in the money market next month, the Reserve Bank of India has made it easier for banks to borrow.
On late Monday evening, RBI announced a temporary reduction in reserve requirement for banks to help them tide over the liquidity shortage that lenders as well as corporates are grappling with. The move will free Rs 40,000 crore, but may turn out to be inadequate as money flows out of banks mid-December when corporates and other entities pay advance tax. “It will only bring some order in the money market, nothing more,” said a bond trader with a financial institution.
RBI has told banks that they can reduce the holding of government bonds by two percentage points from the statutory requirement without being penalised. On an average, banks have been borrowing over Rs 1 lakh crore from RBI every day through its liquidity adjustment facility — an arrangement to fund overnight shortfall in cash requirements. But there is a limitation to such fund raising as banks can borrow from RBI only as long as they have surplus government securities to offer as collateral.
Since banks have to statutorily maintain 25% of their deposits in government bonds, they can offer only those securities in excess of 25% as collateral. Earlier this month, banks were allowed to bring down their gilt holdings to 24% of deposits to allow them borrow more. Now, with the latest relaxation, they can bring down their holdings to 23% of deposits up to January 28, 2011. The balance 2% can thus be pledged with RBI to raise short-term money.
While the penalty waiver amounts to a cut in the statutory liquidity ratio (SLR), RBI has technically kept it unchanged at 25%.
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