RBI announces special measures to increase money supply

MUMBAI: Following Rs 15,000 crore IPO of state-owned Coal India ltd (CIL) and a spurt in festival season demand, the Reserve Bank today announced special measures to increase money supply in the financial system.

According to the RBI's special measures, banks would be able to avail of more funds under the liquidity adjustment facility ( LAF) for up to one per cent more on their deposits.

Besides, special LAF auctions will be conducted at 2:30 pm on October 29 and at 4:15 pm on November 1, RBI said.

A special two-day repo auction facility will also be available for banks on October 30.

The RBI said that the measures were temporary and "arising out of frictional liquidity pressure".

CIL has garnered an astounding Rs 15,000 crore from the stock market, becoming the largest IPO in the history of corporate India.

The mega IPO, according to analysts, caused stress on the money market as investors borrowed heavily to subscribe to the issue.

The CIL IPO will have some temporary stress in the money market as liquidity is likely to shift from general banking system to financing the issue, they said.

According to estimates, the total liquidity impact of the IPO could be about Rs 1.5 lakh crore.

Two and a half years ago, another large IPO -- Reliance Power -- had also caused some temporary stress in the money market. In India's biggest IPO before CIL's, the Anil Ambani Group company had raised Rs 11,500 crore in January 2008.

A money market dealer said that a minor appreciation in Indian rupee due to this heavy inflow cannot be ruled out.

The CIL IPO has seen a broad endorsement from almost all the big as well as small investment banking firms.