RBI squeezes banks’ liquidity further to prop up rupee

The Reserve Bank of India (RBI) has tightened liquidity of banks further by lowering the overall access to its liquidity adjustment facility (LAF) to 0.5 per cent of the net demand and time deposits (NDTL) of each individual bank, effective today.

''The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL outstanding as on the last Friday of the second preceding fortnight. This measure will come into effect immediately, i.e., from July 24, 2013 and will remain in force until further notice''. RBI said in a notification on Tuesday.

The central bank also raised the minimum average cash reserve ratio to be maintained on a daily basis to 99 per cent of the prescribed CRR against the current level of 77 per cent.

''Currently, banks are allowed to maintain their CRR prescribed by the RBI on an average daily basis during a reporting fortnight, with a minimum of 70 per cent of the required CRR on a daily basis. Effective from the first day of the next reporting fortnight, ie, from 27 July 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement,'' RBI said.

The RBI also announced the sale of Rs6,000 crore of short-term cash management bills to drain out more cash from the banking system.

While the RBI stayed on course to check the flow of funds to speculative forex trading, the rupee has risen only 0.2 per cent since the RBI stepped in last week to try to create demand for the rupee by aggressively draining cash from money markets and sharply raising short-term interest rates.

However, bonds yields have surged across maturities, with 10-year benchmark bond yields up 62 basis points since the RBI's initial measures.

This has helped SEBI to sell nearly $4 billion worth of government bonds to foreign institutional investors in the latest round of auction.