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Several steps taken to enhance domestic rupee liquidity
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The Economic Survey 2008-09, presented by Finance Minister Shri Pranab Mukherjee in Parliament today says variation in cash balances of the Central Government, capital flows and the concomitant foreign exchange operations of the Reserve Bank of India (RBI)were the key drivers of liquidity conditions during the year. RBI continued its policy of active management of liquidity during the financial year 2008-09 using CRR, Open Marked Operations (OMC) including the Market Stabilization Scheme (MSS) and the Liquidity Adjustment Facility (LAF) to maintain appropriate liquidity in the system so that all legitimate requirements of credit were met consistent with the objective of price and financial stability. Accordingly, monetary and liquidity management operations changed course beginning mid- September, 2008 in order to address the liquidity situation emerging from the unfolding global financial crisis.
The Survey says, Special Market Operations (SMO) were conducted by the RBI during the first week of June, 2008 to the first week of August, 2008 to improve access of public sector of companies to domestic liquidity and alleviate the lumpy demand in the foreign exchange market in the context of the unprecedented increase in international oil prices. The SMOs were, however, liquidity neutral in nature.
For more effective liquidity management and to ensure that the market borrowing programme of the Government was conducted in a non-disruptive manner, the scope of the SMO was widened with effect from February 19, 2009 by including purchases of government securities through an auction based mechanism in addition to purchases through the negotiated dealing system-order matching (NDS-OM) segment.
The Economic Survey 2008-09 says that in order to enhance domestic rupee liquidity, the cash reserve ratio (CRR) as a percentage of the Net Demand and Time Liabilities (NDTL) was redfuced by a cumulative 400 points from 9 per cent with effect from January 17,2009;the Statutory Liquidity Ratio (SLR) as a percentage of the NDTL was reduced by hundred basis point from 25 per cent to 24 per cent with effect from November 8, 2008; a term repo facility for an amount of Rs. 60,000 crore was instituted under the LAF to enable banks to ease liquidity stress faced by Mutual Funds (MFs) and
Non-Banking Financial Companies (NBFCs) with associated SLR exemption of 1.5 per cent of NDTL; an advance of Rs. 25,000 crore was provided to financial institutions under the Agricultural Debt Waiver and Debt Relief Scheme pending release of money by the Government; provision of a reference facility for an amount of Rs. 4,000 crore to the National Housing Bank (NHB) was undertaken to provide liquidity support to the housing sector and a refinance facility to the EXIM Bank was provided with a view to mitigating the pressures on Indian exporting companies.
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