The rupee’s precipitous fall has been giving the Reserve Bank of India’s (RBI) governor sleepless nights. It has pushed up the costs of imports, stoked inflation and exacerbated its current account deficit. It has also put pressure on corporations with unhedged foreign loans.
In an attempt the prop up the rupee, the RBI has been accused of sending conflicting signals to the market. But its actions can be justified in the light of its commitment to the defense of the currency, despite the risks to economic growth.
Here is a quick look at some of the measures the RBI implemented over the past few weeks. To see the impact of these moves in the market and on investors' portfolios, click here.
- The RBI prohibited banks from trading on their own behalf in the currency futures and exchange traded currency options till further orders.
- It attempted to suck money out of the system through Open Market Operations. However, this did not work as the central bank was able to raise only Rs 2,532 crore as against the targeted amount of Rs 12,000 crore.
OMO: Open Market Operation
The buying and selling of government securities in the open market with the aim of expanding or contracting the amount of money in the sytem and impacting short-term interest rates.
- The RBI announced the auction of 28-days Government of India Cash Management Bills. Major part of it got subscribed at high cut off yields signaling that short-term rates will continue to trade high in the near term.
CMB: Cash Management Bill
A CMB is a short-term instrument to meet the temporary mismatches in the cash flow of the government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. The tenure, notified amount and date of issue depends upon the temporary cash requirement of the government.
- Under the Liquidity Adjustment Facility, borrowings were capped at 1% of Net Demand and Time Liabilities, reckoned at Rs 75,000 crore. This means that bank borrowings above Rs 75,000 crore will be at 10.25%. Previously, the amount that banks could borrow from LAF was equivalent to their investment in approved securities that is in excess of the Statutory Liquidity Ratio. Later, the RBI restricted the limit of individual bank borrowing to 0.50% of its NDTL outstanding as on the last Friday of the second preceding fortnight from the RBI's daily borrowing window called LAF. At the same time it scrapped its earlier measure that had limited the total LAF borrowings to the tune of 1% of total deposits or Rs 75,000 crore.
LAF: Liquidity Adjustment Facility
A monetary policy tool used to help banks resolve a short-term cash shortage during periods of economic instability or from any other form of stress. This allows banks to borrow money through repurchase agreements. The banks will use eligible securities as collateral through a repo agreement and will use the money to alleviate their short-term liquidity pressure.
SLR: Statutory Liquidity Ratio
The amount of of liquid assets, such as cash, gold, short-term securities, and government approved securities that a bank must maintain in its reserves.
NDTL: Net Demand and Time Liabilities
Demand liabilities include all liabilities which are payable on demand. Eg: current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/ guarantees, balances in overdue fixed deposits, cash certificates and cumulative/ recurring deposits.
Time liabilities are those which are payable otherwise than on demand. Eg: fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and gold deposits.
- The Marginal Standing Facility rate was hiked by 200 bps above repo to 10.25% (it was at 100 bps over repo earlier).
MSF: Marginal Standing Facility
This is the penalty rate at which banks can borrow over repo rate. Banks typically tap the MSF only if their funding needs cannot be adequately met by the LAF. This measure was introduced by the RBI to regulate short-term asset liability mismatches more effectively.
- Cash Reserve Ratio currently stands at 4%. Banks generally maintain a minimum 70% of total CRR obligation on an average daily basis during a fortnight. However, it needs to be adjusted by the end of a fortnight to maintain 100%. In a fresh move, the RBI increased the daily average requirement from 70% to 99%. "Effective from the first day of the next reporting fortnight i.e., from July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement," the central bank said in a notification.
CRR: Cash Reserve Ratio
The fraction of funds that a bank has to keep with the RBI as reserves. The RBI can hike or lower this rate to either drain excess liquidity from the banking system or release funds to push growth.
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