RBI ready to step in with liquidity support for the banking system

The Reserve Bank of India (RBI) on Thursday said it was ready to provide necessary liquidity support in the banking system and allowed banks to borrow two percentage points more for their liquidity coverage ratio using government securities as collateral.

Money market rates have short up due to liquidity shortage in the system, and generally, the mutual fund (MF) industry is aversed to buying short-term papers of NBFCs after IL&FS started defaulting on its obligation.

Under the Basel III norms, the liquidity coverage ratio is now more important for the banking system than the statutory liquidity ratio (SLR), which is the percentage of deposits banks should hold in bonds.

“It has been decided to permit banks with effect from October 1, 2018, to reckon government securities held by them up to another 2 per cent of their NDTL, under FALLCR (Facility to Avail Liquidity for Liquidity Coverage Ratio) within the mandatory SLR requirement, as Level 1 HQLA (high quality liquid assets) for the purpose of computing their LCR,” RBI said in a notification on its website.

The FALLCR will now be 13 per cent, from 11 per cent earlier.

“This should supplement the ability of individual banks to avail of liquidity, if required, from the repo markets against high-quality collateral. This, in turn, will help improve the distribution of liquidity in the financial system as a whole,” the central bank said in a separate statement.

“Going forward, the Reserve Bank stands ready to meet the durable liquidity requirements of the system through various available instruments depending on its dynamic assessment of the evolving liquidity and market conditions,” the RBI said.

The liquidity deficit in the system was to the tune of Rs 715 billion, as on September 26. But it had crossed Rs 1.4 trillion in the week. As of Wednesday, banks had availed Rs 1.88 trillion of liquidity support through the RBI’s repo window.

Since the liquidity tightness started in end-August, the central bank conducted two open market operations to purchase bonds, infusing Rs 200 billion into the system.