Under the law, 25% of bank deposits must be invested in SLR bonds. RBI has recently brought down the level to 24%, offering a temporary relief to banks. If RBI wants to buy back MSS bonds from banks, their SLR level will go down below 24%. So, along with the CRR cut, RBI also needs to bring down the SLR requirement to free up money.
RBI can also open a special repo window for mutual funds, large NBFCs and housing finance firms, and money can be offered in exchange of AAA-rated securities as collaterals. This will not only ease the pressure on the banking system but also avert the impending collapse of some of the funds and NBFCs. Unlike banks, mutual funds have very small capital base and some of the liquid funds may see their entire capital being wiped out by losses.
Once the government gets Parliament’s nod for oil bonds and subsidy for fertilizer firms and reimburses banks for the farm loan waiver package, money will flow into the system. Besides, this will enable the oil marketing firms to buy dollars directly from RBI, pledging the bonds, easing the pressure on the foreign exchange market.
In a late night statement on Friday, RBI governor D. Subbarao said the central bank “has taken action to inject liquidity into the system as warranted by the situation” and it is “ready to take appropriate, effective and swift action”.
The challenge before RBI now, apart from injecting liquidity, is to break the expectation of a daily depreciating rupee. It has been selling dollars every day in the past few weeks and the pattern of its intervention is predictable, allowing the foreign exchange market to form a view on the currency. This needs to be broken fast. With $284 billion in its kitty, the fourth largest foreign currency chest outside the Euro zone, after Japan, China and Russia, it can afford to be bold in its currency management strategy which is now inseparable from liquidity management.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to bankerstrust@livemint.com
Also Read Tamal Bandyopadhyay’s earlier columns