RBI Measures to Stabilize Exchange Rate


RBI Measures to Stabilize Exchange Rate

On July 15, 2013, the Reserve Bank of India (RBI) announced some measures to reduce the availability of money in the banking system (systemic liquidity) with the aim of stabilizing the exchange rate.

These measures were:

Restricted borrowing by banks under Liquidity Adjustment Facility (LAF) to 1% of their net demand and time liabilities (NDTL), which is around Rs. 75,000 crore. LAF is a facility that allows banks to borrow money on an overnight basis against collateral, in case of a shortfall in their cash requirement

Hiked Marginal Standing Facility (MSF) rate by 2% to 10.25% with effect from July 17, 2013.

This is the rate at which banks can borrow from RBI over and above 1% through LAF, which is currently at 7.25%. MSF is a liquidity facility that banks can use to borrow against their holdings of government securities in case they fall short of liquidity for their daily needs

Conduct Open market Operations (OMO) sale i.e. sell securities to market in order to absorb liquidity of Rs 12,000 crore on Thursday, July 18, 2013

On July 23, 2013, the RBI announced measures to further curtail liquidity in the system:

RBI reduced the availability of liquidity through the LAF window from 1% to 0.5% i.e. around

Rs. 37,500 crore. This measure will come into effect from July 24, 2013 and will remain in force until further notice.

Banks have also been asked to set aside a higher amount of cash towards maintaining the cash reserve ratio (CRR). Effective July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement, up from a minimum of 70 per cent earlier.

CRR is the amount of deposits that banks maintain with the RBI for liquidity requirements.

All these measures are aimed at containing volatility in the rupee exchange rate. We expect these measures to remain in place till the rupee stabilizes. At the same time, if the rupee exhibits higher volatility as compared to its Asian peers, more RBI measures could be expected. We remain cautious.

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