Banks will see a sharp drop in the cost of short-term funds with the Reserve Bank of India cutting the rate at which it provides emergency overnight funds, coupled with a new 7-day and 14-day lending facility for banks. The improved liquidity position of banks will help keep in check interest rates, which were facing upward pressure after RBI hiked key policy rates on September 20.
Emboldened by a steady rupee, RBI on Monday reversed some of the measures aimed at tightening liquidity as part of its defence measures against rupee volatility. The central bank reduced its marginal standing facility (MSF) rate by 50 basis points from 9.5% to 9.0% with immediate effect. The MSF is an emergency funding facility for banks to meet shortfall in their overnight cash requirement. With RBI placing restrictions on how much banks can borrow under the repo window – the conventional facility for overnight lending to banks – the MSF rate has become the floor rate in money markets. RBI had hiked the MSF rate by 200 bps in mid-July to drain out liquidity and make it difficult for speculators to go long on the dollar.
Besides reducing the MSF rate, RBI said that it would provide banks additional liquidity through term repos of 7-day and 14-day tenor for up to a fourth of the banking system deposits through auctions every Friday. Given that bank deposits amount to Rs 68.70 lakh crore, the amount of liquidity released because of RBI’s measures would be over Rs 17,000 crore.
Bankers said that RBI’s move was prompted by confidence in the rupee being in the current range. After hitting a record low of 68.85 against the dollar on August 28, the rupee has gained 11.4% to close at 61.79 per dollar on Monday.
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