RBI to infuse ₹3.7 trillion in financial system to boost liquidity
The Reserve Bank of India ( RBI) on Friday announced a host of measures aimed at boosting liquidity in the banking system in the backdrop of prevailing economic uncertainty due to coronavirus (COVID-19) outbreak. The specific measures announced by Governor Shaktikanta Das are expected to infuse an additional ₹3,74,000 crore into the banking system as they take effect.
As part of the measures, Reserve Bank said it will conduct auctions of targeted term repos of up to three years tenor, for a total of up to ₹1 trillion, at a floating rate linked to the repo rate. Liquidity availed under the scheme by banks will be deployed in investment grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.
As a one-time measure to help banks tide over the disruption caused by COVID-19, RBI announced reduced cash reserve ratio (CRR) for all banks by 100 basis points to 3.0% of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020.
This reduction in the CRR would release primary liquidity of about ₹1.37 trillion uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess statutory liquidity ratio. This dispensation will be available for a period of one year ending on March 26, 2021.
To provide comfort to the banking system following the liquidity stress amid high volatility in financial markets, RBI has increased the Marginal Standing Facility (MSF) limit to 3% from 2% with immediate effect. This measure will be applicable up to June 30.
This step will allow banks to avail an additional ₹1.37 trillion of liquidity under the LAF window in times of stress at the reduced MSF rate announced in the MPC’s resolution.