RBI announces special measures to increase money supply

MUMBAI: In a bid to ease liquidity pressure on the banking system due to a spurt in festival season demand, the Reserve Bank on Tuesday 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.

"Scheduled commercial banks may avail of additional liquidity support under the LAF to the extent of up to 1.0 per cent of their net demand and time liabilities (NDTL) as on the reporting Friday of the second preceding fortnight," RBI said in a statement.

"For any shortfall in maintenance of statutory liquidity ratio (SLR) during November 9-December 16, 2010, arising out of availment of this facility, banks may seek waiver of penal interest purely as an ad hoc, temporary measure," it said.

Besides, special LAF auctions will be conducted during at 4:30 pm every day till December 16, it said.

The above measures are purely ad hoc, temporary and will be in force till December 16, 2010, it added.

There has been liquidity crunch in the system due to festival demand and Coal India IPO that sucked liquidity over Rs 15,000 out of the system.

Even in days to come, liquidity is likely to be tight as there are a slew of IPOs lined up and credit off-take is likely to pick up.

In the second quarter review of Monetary Policy, 2010-11, announced last week, RBI had stated that "even though a liquidity deficit is consistent with an anti-inflation stance, excessive deficit in liquidity can be disruptive both to financial markets and to credit growth in the banking system."

To ensure that economic activity is not disrupted by liquidity constraints, the liquidity deficit needs to be contained within a reasonable limit, the review said.

In the recent period, RBI has taken a number of steps, including open market operations (OMO) to alleviate liquidity pressure. Even then liquidity pressure continues reflecting government's cash balances and other frictional liquidity demand, it said.

For example, liquidity injected by the RBI through its liquidity adjustment facility (LAF) window on an average was about Rs 1,13,000 crore during November 8-9, 2010.