The Reserve Bank of India today announced a further 100 basis point reduction in the cash reserve ratio (CRR) for banks from the 7.5 per cent announced earlier to 6.5 per cent effective 11 October.

The cash reserve ratio is the ratio of their net demand and time liabilities (NDTL) that banks have to park eith the central bank.

''On a review of the evolving liquidity situation, it has been decided to reduce the CRR by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on 11 October 2008,'' the RBI said in a release.

This measure will release additional liquidity into the system of the order of Rs40,000 crore, the release added.

 Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).

The RBI also said that banks, although on a purely temporary basis, may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL.

This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008.  This accommodation will be in addition to the temporary measure announced on 16 September permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.   

RBI is also planning to institute a mechanism of Special Market Operations (SMO) for public sector oil marketing companies similar to the one in June-July 2008 when oil bonds become available. 

It has also decided to increase the interest rate ceiling on FCNR(B) deposits of all maturities by 50 basis points, ie, to Libor/Euribor/Swap rates plus 25 basis points.
(b)  Interest Rate on NR(E) RA Deposits.

It has also been decided to increase, with immediate effect, the interest rate ceiling on NR(E)RA  deposits by 50 basis points, ie, to Libor/Euribor/Swap rates plus 100 basis points.

Banks will also be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.

The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions, RBI said. 
  
The Reserve Bank 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, price stability and inflation expectations. , the release added.