In its Mid-Term Review of Monetary Policy on October 24, 2008, the Reserve Bank
of India indicated that it will closely and continuously monitor the liquidity
and monetary situation and respond swiftly and effectively to the impact of the
global developments on Indian financial markets. The Reserve Bank also indicated
that the challenge for the conduct of monetary policy is to strike an optimal
balance among preserving financial stability, maintaining price stability and
sustaining the growth momentum.
2. In response to emerging
global developments, the Reserve Bank has taken a number of measures since mid-September
2008. The aim of these measures was to augment domestic and forex liquidity
and to enable banks to continue to lend for productive purpose while maintaining
credit quality so as to sustain the growth momentum. The following is a
synopsis of the important measures taken:
repo rate under the liquidity adjustment facility (LAF) has been reduced by a
cumulative 150 basis points since October 20, 2008. Accordingly, the repo
rate has been brought down from 9.0 per cent to 7.5 per cent.
- In order to enhance rupee liquidity,
the cash reserve ratio (CRR) has been reduced by a cumulative 3.5 percentage points
of net demand and time liabilities (NDTL) since October 11, 2008. Accordingly,
the CRR has been brought down from 9.0 per cent to 5.5 per cent of NDTL.
statutory liquidity ratio (SLR) has been reduced by one percentage points, that
is, from 25 per cent of NDTL to 24 per cent.
- A term
repo facility for an amount of Rs.60,000 crore has been instituted under the LAF
to enable banks to ease liquidity stress faced by mutual funds (MFs) and non-banking
financial companies (NBFCs) with associated SLR exemption of 1.5 per cent of NDTL.
- The Reserve Bank provided an advance of Rs.25,000
crore to financial institutions under the Agricultural Debt Waiver and Debt Relief
Scheme pending release of money by the Government.
special refinance facility has been introduced for scheduled commercial banks
(excluding regional rural banks or RRBs) with a limit of 1.0 per cent of each
bank's NDTL as on October 24, 2008 at the LAF repo rate up to a maximum period
of 90 days. During this period, refinance can be flexibly drawn and repaid.
Reserve Bank has put in place a mechanism to buy back dated securities issued
under the market stabilisation scheme (MSS) so as to provide another avenue for
injecting liquidity of a more durable nature into the system.
- The Reserve Bank announced that it
would continue to sell foreign exchange (US dollars) through agent banks to augment
supply in the domestic foreign exchange market or intervene directly to meet any
- The Reserve Bank announced that
it would institute special market operations to meet the foreign exchange requirements
of public sector oil marketing companies against oil bonds when they become available.
- The interest rate ceilings on FCNR (B) and NR(E)RA
term deposits were increased by 100 basis points each.
commercial borrowings (ECBs) up to US $ 500 million per borrower per financial
year were permitted for rupee expenditure and/or foreign currency expenditure
for permissible end-uses under the automatic route.
all-in-cost ceiling for ECBs for average maturity period of three years and up
to five years was enhanced to 300 basis points above LIBOR and to 500 basis points
above LIBOR for ECBs over five years.
- The all-in-cost
ceiling for trade credit less than 3 years was enhanced to 6 months LIBOR plus
200 basis points.
- Systemically Important Non-Deposit
taking NBFCs have been temporarily permitted to raise short-term foreign currency
borrowings under the approval route, subject to their complying with the prudential
requirements of capital adequacy and exposure norms.
Global financial conditions continue to be uncertain and unsettled with ripple
effects on domestic money, forex and credit markets. There are indications that
the global slowdown is deepening with a larger than originally expected impact
on the domestic economy, particularly for the demand conditions in the medium
and small industry sector and export-oriented sectors. In the context of
these developments, further augmenting rupee and forex liquidity, strengthening
credit delivery mechanisms and improving credit delivery are imperative for sustaining
the growth momentum. Particular attention needs to be paid to maintaining
the viability of sectors that contribute significantly to employment and exports.
4. On a further review of the evolving developments, the
Reserve Bank has decided to take the following measures:
(i) The special term repo facility, introduced
for the purpose of meeting the liquidity requirements of MFs and NBFCs will continue
till end-March 2009. Banks can avail of this facility either on incremental or
on rollover basis within their entitlement of up to 1.5 per cent of NDTL.
Foreign Currency Non-Resident (Banks) [FCNR(B)] Scheme
Currently, the interest rate ceiling on FCNR(B) deposits is fixed at Libor/Swap
rates plus 25 basis points for the respective currency/ corresponding maturities.
In view of the prevailing market conditions, it has been decided to increase the
interest rate ceiling on FCNR (B) deposits by a further 75 basis points, i.e.,
to Libor/Swap rates plus 100 basis points with immediate effect.
(External) Rupee Accounts [NR(E)RA]
the interest rate ceiling on NR(E)RA is set at Libor/Swap rates plus 100 basis
points for US dollar of corresponding maturities. It has now been decided to increase
the interest rate ceiling on NR(E)RA deposits by a further 75 basis points, i.e.,
to Libor/Swap rates plus 175 basis points with immediate effect.
(iv) It has been decided to allow,
as a temporary measure, housing finance companies (HFCs) registered with the National
Housing Bank (NHB) to raise short-term foreign currency borrowings under the approval
route, subject to their complying with prudential norms laid down by the NHB.
Details in this regard are being notified separately.
of Foreign Currency Convertible Bonds (FCCBs)
account of the global developments, FCCBs issued by Indian corporates are currently
trading at a discount. There is a benefit to the company concerned as well as
to the economy if corporates buy back the FCCB at the prevailing discounted rates.
In view of these potential benefits, Reserve Bank of India will consider proposals
from Indian companies to prematurely buy back their FCCBs. The buy back should
be financed by the company's foreign currency resources held in India or abroad
and/or out of fresh external commercial borrowing (ECB) raised in conformity with
the current norms for ECBs. Proposals in this regard will be considered under
the approval route. Extension of FCCBs will also be permitted at the current all-in
cost for the relative maturity.
In view of the difficulties being faced by exporters on account of the weakening
of external demand, it has been decided to extend the period of entitlement of
the first slab of pre-shipment rupee export credit, currently available at a concessional
interest rate ceiling of the benchmark prime lending rate (BPLR) minus 2.5 percentage
points from 180 days to 270 days with immediate effect.
At present, the ECR limit is fixed at 15 per cent of the outstanding rupee export
credit eligible for refinance as at the end of the second preceding fortnight.
The aggregate limit of ECR is currently around Rs.9,500 crore. It has now been
decided to enhance the eligible limit of the ECR facility for scheduled banks
(excluding RRBs) to 50 per cent of the outstanding export credit eligible for
refinance. This will provide additional liquidity support to banks of an amount
of about Rs.22,000 crore. The rate of interest charged on the ECR facility will
continue to be the prevailing repo rate under the LAF which is currently 7.5 per
(viii) Taking into account the need to ensure the
growth momentum in the employment-intensive sectors of micro and small enterprises
and housing, it has been decided to immediately allocate amounts, in
advance, from scheduled commercial banks for contribution to the SIDBI and the
NHB to the extent of Rs.2,000 crore and Rs.1,000 crore, respectively, against
banks’ estimated shortfall in priority sector lending in March 2009. The
allocation now made in respect of SIDBI and NHB will be adjusted against the banks’
actual achievement of the target/sub targets for priority sector lending as at
the end of March 2009. The bank-wise allocations are being notified separately.
(ix) In order to provide further comfort on liquidity and
to impart flexibility in liquidity management to banks, on November 1, 2008, the
Reserve Bank introduced a special refinance facility under Section 17(3B) of the
Reserve Bank of India Act, 1934 under which all scheduled commercial banks (excluding
RRBs) are provided refinance from the Reserve Bank equivalent to up to 1.0 per
cent of each bank's NDTL as on October 24, 2008 at the LAF repo rate up to a maximum
period of 90 days. Banks are encouraged to use this facility for the purpose of
extending finance to micro and small enterprises.
a counter-cyclical prudential measure, the general provisioning requirement on
standard advances for residential housing loan beyond Rs.20 lakh has been progressively
increased from 0.25 per cent to 1.0 per cent, while that on standard advances
in the commercial real estate sector, personal loans including outstanding credit
card receivables, loans and advances qualifying as capital market exposure and
non-deposit taking systemically important NBFCs has been progressively increased
from 0.25 per cent to 2.0 per cent. In view of the current macroeconomic, monetary
and credit conditions, it has been decided, consistent with the practice of dynamic
provisioning, that the provisioning requirements for all types of standard assets
will stand reduced to a uniform level of 0.40 per cent except in case of direct
advances to agricultural and SME sector which shall continue to attract provisioning
of 0.25 per cent, as hitherto. The revised norms will be effective prospectively,
but the provisions held at present should not be reversed.
Similarly, risk weights on banks’ exposures to certain sectors, which had been
increased counter cyclically, are also being revised downward
in view of the current macroeconomic, monetary and credit conditions. All
unrated claims on corporates shall attract a uniform risk weight of 100 per cent
as against the risk weight of 150 per cent for such exposures prescribed earlier
which was applicable for exposures above Rs 50 crore from April 1, 2008 and for
exposures above Rs 10 crore from April 1, 2009. Claims secured by commercial real
estate shall attract a risk weight of 100 per cent as against the earlier risk
weight of 150 per cent. Claims on rated as well as unrated non-deposit taking
systemically important non-banking financial companies (NBFC-ND-SI) shall be uniformly
risk weighted at 100 per cent. As regards the claims on asset financing
companies (AFCs), there is no change in the risk weights, which would continue
to be governed by the credit rating of the AFCs, except the claims that attract
a risk weight of 150 per cent under the new capital adequacy framework, stands
reduced to a level of 100 per cent.
5. The Reserve
Bank will continue to closely monitor the developments in the global and domestic
financial markets and will take swift and effective action as appropriate.