RBI opened 25000-crores Rupees Special Liquidity Window for Mutual Funds

The Reserve Bank of India (RBI) on 17 July 2013 opened a special liquidity window for commercial banks to meet the cash requirements of mutual funds (MFs).

The special liquidity window was opened taken into concern the Mutual Funds which faced heavy redemption pressure in debt-oriented MF schemes following a series of steps taken by the RBI to shore up the faltering currency.

Keeping all this into consideration the RBI opened a special three-day repo window that will allow banks to borrow a total of 25000 crore Rupees at a rate of 10.25%. Banks can borrow this money to lend onwards to MFs.

RBI will conduct the first repo auction under the special facility on 19 July 2013.The second auction is scheduled for 23 July 2013 and the subsequent operations at an interval of three days. Individual banks will be allocated funds in proportion to their bids, subject to the overall ceiling of 25000 crore, Rupees.

In addition, banks availing of the additional liquidity support can seek a waiver of penal interest for any shortfall in maintenance of the statutory liquidity ratio (SLR) up to 0.5% of their deposits, in addition to the 2% waiver allowed under the marginal standing facility (MSF). SLR refers to the proportion of deposits that have to be invested in government securities.

On 15 July 2013, RBI sought to curb liquidity in the debt markets by making it more expensive to borrow money in a bid to prevent speculation in the currency market. The rupee, which fell to a lifetime low of 61.21 against the dollar on 8 July, has recouped some losses following measures by RBI and the Securities and Exchange Board of India. After having lost as much as 7% since the beginning of the year, the rupee has recovered by about 3% against the dollar.

RBI fixed the borrowing limit for banks at 1% of the system’s net demand and time liabilities, or banks’ total deposit base. Effective 17 June 2013, the overnight borrowing limit was set at 75000 crore Rupees for the entire banking system. There was no limit earlier.

Besides the borrowing limit, RBI also raised the interest rate on money that banks borrow from MSF to tide over liquidity shortages—by two percentage points to 10.25%.

The RBI is also planning to sell bonds worth 12000 crore Rupees in the secondary market on 18 July 2013 for another liquidity draining measure.