RBI promises adequate rupee, forex liquidity; markets weak
08 Aug 2011
In an attempt to calm the Indian markets after Standard & Poor's downgraded U.S ratings, the Reserve Bank of India (RBI) ensured investors of adequate rupee and forex liquidity, even though it did not help much as markets opened lower on Monday.
RBI, the country's central bank, made the announcement before the markets opened for trading. However, the 30-index BSE Sensex opened by lower by 2.4 percent, rupee weakened to lowest in last five weeks and Bond yields fell to 3-week troughs.
As Friday's market behaviour demonstrated, India is not insulated from such developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors, it said in a statement.
"In the immediate future, the Reserve Bank's priority is to ensure that adequate rupee and forex liquidity are maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates. Rupee liquidity is being provided through the repo window of the Liquidity Adjustment Facility (LAF)," it said.
As of now, the banking system does not face any liquidity pressures as evident from the low level of dependence on liquidity injections under the LAF. In any case the banking system currently has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for repo transactions, it added.
Further, the capacity of the LAF to inject liquidity has recently been augmented by the introduction of the Marginal Standing Facility (MSF), which allows banks to draw down SLR securities up to a further one per cent of their Net Demand and Time Liabilities (NDTL) in order to meet liquidity requirements. This will help stabilise the call rate within the LAF corridor, which is currently 7-9 per cent.
