Mumbai / New Delhi: Acting in concert, the finance ministry, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) unveiled a string of measures on Wednesday to increase liquidity in the system and boost investor confidence.

Bankers, however, say that even these may not be enough to ease the liquidity crunch in the system and boost investor confidence.

The measures announced included a 100 basis points reduction by RBI in the cash reserve ratio (CRR) that determines the cash balance banks need to keep with the central bank, with retrospective effect from Saturday, 11 October. With this, RBI has cut CRR by an unprecedented 250 basis points to 6.5% in one shot, freeing up Rs1 trillion. One basis point is one-hundredth of a percentage point.

Also See Additional Boost (Graphic)

The banking regulator also announced additional liquidity support for mutual funds (MFs) by allowing banks to keep 23.5% of their deposits in government bonds. Although RBI dubbed it as a “purely temporary measure", the move amounts to a cut in banks’ statutory liquidity ratio (SLR).

Under Indian banking laws, banks are currently required to invest 25% of their deposits in government bonds in the form of SLR. They use the excess investment in such bonds as collateral to get funds from RBI. This means that if a bank does not have excess SLR investments, it cannot avail RBI funds. On 16 September, RBI had brought down the requirement to 24% and on Wednesday, 23.5%. Banks will use the headroom to borrow money from RBI for MFs that are facing redemption pressure. On Tuesday, RBI opened a Rs20,000 crore liquidity window for MFs.

In New Delhi, finance minister P. Chidambaram announced a doubling in the investment ceiling for foreign institutional investors (FIIs) in corporate debt to $6 billion (Rs29,040 crore); recapitalization of banks that have less than 12% capital adequacy ratio; and fast-track reimbursement to public sector banks for the Rs66,500 crore of farm loans they waived earlier this year.

All these measures were announced after market hours.

Earlier, India’s bellwether stock index, the Sensex, slumped about 5.9%, or 674 points, to 10,809 after a two-day relief rally. Most Asian markets closed in the red and European markets fell in early trade. US markets opened weak too and the Dow Jones Industrial Average was trading around 400 points down at 9pm India time.

Steps taken by European and Asian governments— ranging from bailout packages to credit guarantee for banks— did help over the past two days in easing inter-bank lending rates and soothing panic-stricken investors, but by Wednesday, market participants in India started feeling RBI’s Rs60,000 crore cash release through a CRR cut and a Rs20,000 special window for MFs were not enough.

Sebi action

Meanwhile, capital market regulator Sebi moved to clamp down on a parallel offshore market for short-selling Indian securities by foreign investors, who lend and borrow stocks through available stock inventory of participatory notes and may be contributing to the fall in markets. A Sebi release said sales in the Indian market by FIIs and their sub-accounts are also possibly on account of the securities being lent by them or sub-accounts abroad.

“To lend more transparency to the market, it has been decided that the position of the securities lent by these entities abroad shall be disseminated on a consolidated basis twice a week, i.e. on Tuesday and Friday of every week," Sebi said.

According to a senior Sebi official, who did not want to be named, the regulator is collecting the details of such activities and FIIs are expected to furnish data even if they are doing such business overseas, beyond Sebi’s jurisdiction.

Sebi also raised the margin requirement for exchange-traded equity derivatives. “With a view to ensure market safety and safeguard the interest of investors, it has now been decided that the exposure margin shall be higher of 10%, or 1.5 times the standard deviation," Sebi said.

“This will restrict speculative tendencies of the market and will create a regulatory activity on traders and speculators to open big positions," Jagannadham Thunuguntla, equity head of Nexgen Capital said. Currently, the limit for the margin requirement in derivative products is 5%.

Chidambaram said the government would be sending an advisory to banks to restart their credit operations, which had been suspended after the global meltdown. He also said that at the request of government, RBI has agreed to provide Rs25,000 crore to the lending institutions immediately to reimburse part of the money they waived for farm loans.

The government is also setting up a mechanism that will enable Indian banks to raise their capital adequacy ratio, or the ratio of a bank’s capital to its risk-weighted assets, a key indicator to financial strength, to 12%. “The details of the capitalization scheme are being worked out," the finance minister said.

Apart from releasing cash through the CRR cut, RBI also raised interest on several categories of foreign deposits, including those by RIs (non-resident Indian; by 50 basis points), and so-called FCNR(B) ones (by 25 basis points) to attract foreign money even as the FII inflow is drying up.

After pumping in $17.36 billion into the Indian equity markets last year, FIIs have pulled out some $11 billion so far this year.

In yet another move to raise banks’ ability to borrow overseas, RBI allowed Indian banks to borrow funds from their overseas branches, up to 50% of their equity or $10 million, whichever is higher, against the existing limit of 25%.

PTI contributed to this story.