The Reserve Bank of India (RBI) announced this week several measures it was taking in order to inject more capital into India’s financial system. Specifically, the RBI made further cuts to the cash reserve ratio, reducing the ratio by one percentage point to 6.5%, retroactive to October 11, 2008. This was the second cut in just one week. The RBI previously announced on October 10, 2008 a reduction in the cash reserve ratio from 8.5% to 7.5%. RBI estimates that the most recent cut will release additional liquidity into the financial system in the amount of 400 billion rupees ($8.2 billion). Additionally, the RBI relaxed the statutory liquidity ratio to make loans from banks easier for redemption-pressured mutual funds, and increased the interest rates on bank deposits held by non-residents in rupees and foreign currency by 50 basis points.
Additionally, the RBI stated that it would release 250 billion rupees ($5.1 billion) to banks and cooperative credit institutions under a farm loan waiver scheme, pursuant to which commercial banks will receive approximately $1.54 billion and the National Bank for Agriculture and Rural Development, a state-run lender to the farming sector, will receive around $3.6 billion. India’s Finance Ministry announced this week that it would not require these banks and cooperative credit institutions to provide collateral for these loans. In the same released statement, the Indian Finance Ministry also announced that it would raise the limit on foreign investment in Indian corporate bonds from $3 billion to $6 billion, and promised to provide support to commercial banks to increase their capital adequacy ratio to 12%.
Further, on October 14, 2008, the RBI announced and conducted a fourteen-day money auction to help banks meet the cash requirements of mutual funds facing higher redemption demands from investors. The special fixed rate repo under the liquidity adjustment facility was conducted at 9% against the collateral of eligible securities and banks utilized 35 billion rupees ($728 million) under this facility. The RBI stated that it would extend the facility until further notice up to a cumulative amount of 200 billion rupees ($4.1 billion).