RBI Q3 Press Release-2008-09- Part 1

SIMPLIFYING THE Q-3 PRESS RELEASE OF THE RBI

RBI Q3 Press Release-2008-2009/1164

Despite all initial rejection of any theory on the global crisis impacting India any way, we saw the world's a small place- A disease in one place spreads easily to the other places. In this case, the disease was passed onto the emerging markets by the developed nations. Nonetheless, we know now that no Nation- however big or small is insulated from the turmoils that the world is witnessing. If there is anything that is surprising, it is the magnitude of the impact and the uncertainty over how deep will the sword cut through before it is put back into its sheath!

The RBI has, to begin with, acknowledged that since its Mid year review, the world financial markets have come a long way. It says that while there has been a cyclical moderation in growth, there is scope for further downside as a consequence of the events plaguing the global markets. The repo and Reverse repo were unchanged, but the stock markets had already factored this in and hence did not react much to this news at the time.

• An interesting thing that is worth mentioning is the Govt's announcement of setting up a Special Purpose Vehicle[SPV] to bail out the cash strapped Non Banking Finance Corp [NBFCs].

• The SPV would issue govt guaranteed securities to the RBI. Then it would with these funds buy investment grade products and non convertible debentures of NBFCs, thereby providing them with the the much needed liquidity, but at the same time also ensuring these funds are NOT USED FOR EXPANSION. The below diagram i made should help understand the flow of liquidity.

In recessionary times, liquidity of domestic currency is of prime importance and every country's Central Bank ensures the same is taken care of. Our RBI is obviously not an exception.

• To ensure that banks have sufficient funds, RBI has been reducing the CRR over the past quarter. The CRR or Cash Reserve Ratio is the amount of bank's cash parked with the RBI. Reduction of this ratios naturally frees up the funds for lending, creating a liquid base for the rupee.
• The Repo Rate[rate @ which RBI lends money] was brought down from 9% to 5.5% in just one quarter. The Reverse Repo was brought down from 6%to 4%. What this does is induce banks to borrow more from the RBI as rates are lower, lend more consequently improving the liquidity situation.
• RBI is also allowing banks a special refinance facility without any collateral.
• The Statutory Liquidity Ratio [SLR] is reduced by one percentage point

What does the reduction in SLR hold for us? Well, it is the percentage of deposits that banks must invest in govt or govt approved securities. So, reducing SLR frees up more money for credit deployment.

Whew! I am tired, am sure if u have been reading till here, so are you![ unless u follow Latha Venkatesh on CNBC TV18 or are an avid follower [by force or choice] of government and RBI policies.] I touched upon the steps RBI had taken to ease the domestic liquidity situation.

BUT What has RBI done to manage forex liquidity? What about sector specific credit that is now facing the heat with Capital Markets drying up and NBFCs themselves in deep trouble?

On my next post....