The high liquidity crisis has forced RBI to ease out the SLR norms for banks. The liquidity deficit in the banking sector has crossed Rs. 1 lakh crore, and RBI now permits Banks to use a bigger share of their Statutory Liquidity reserves.
- Under this notification, RBI makes it clear that Banks can carve 15% of the Statutory Liquidity Reserve, to meet the shortage in Liquidity requirements (otherwise known as Liquidity Coverage Ratio : LCR) as compared to the previous norm of 11-13%.
- As per the current terms Banks are required to maintain 19.5% SLR and 16% LCR.
- The deficit position in the liquidity is attributed to advance payments and interventions in the forex market to augment the rupee fall against US dollar.
- This in turn also made the call money go up to a 29 month high ie., 6.6% in the previous week.
- The liquidity crunch and also on the apprehensions of the Repo rate going up in October, the yield on the bond market has remained at 8% market for several weeks and with the RBI announcement the yield on bond market closed at 8.027% with a sigh of relief.
- Experts also feel that the current situation warrants a reduction in the CRR.
- RBI adds that the permission accorded ie, the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) from the existing 11% to 13% will take the SLR available to 15% of the NDTL (Net Demand and Time Liabilities).
- Though this permission might not provide that much leverage to banks as it would give in case of a direct cut in the SLR or CRR, it will give more high quality collateral to banks to borrow from the REPO window, which in turn will improve the liquidity position in the market.
- Banks are already maintaining a high SLR though they are expected to maintain only 19.5%, since they are reluctant to sell the bonds in the market where the interest rates are high and any sale deal at this juncture would end up in a mark to market loss.
- Further following are other reasons attributed for the liquidity crunch in the market:
- RBI has conducted Open Market Operations (OMOs). It has resorted for an OMO in September for an amount of Rs. 10,000 crore which sucked the liquidity position in the market .
- Also, RBI had sold Government Securities for Rs. 12,000 crore in September this year