RBI announces additional measures to check Indian rupee slide.

With the rupee still continuing to be weak, the Reserve Bank today announced additional liquidity tightening measures to contain excessive speculation and volatility in the foreign exchange market.

RBI has reduced the liquidity adjustment facility (LAF) for each bank from 1 per cent of the total deposits to 0.5 per cent, thus limiting the access to borrowed funds from the central bank. The limit will come into force with immediate effect and continue till further notice, the RBI added.

In another measure to suck out liquidity from the system, RBI has asked banks to maintain higher average CRR (cash reserve ratio) of 99 per cent of the requirement on daily basis as against earlier 70 per cent. CRR is portion of deposits that banks are required to keep with RBI.

According senior bankers, the measures could suck out Rs 4,000-Rs 5,000 crore from the system.
The additional measures to check exchange rate volatility comes within 10 days of RBI taking stern steps to suck out liquidity from the system.

On July 15, the RBI had raised short term interest rates and announced to sell government securities worth Rs 12,000 crore. However, it raised only 2,532 crore from the open market sales (OMS) on July 18.

Initially, RBI injected dollars into the market to check slide of rupee, which touched a life time low of 61.22 level against the dollar. It fell four paise to end at a week's low of 59.76 against the dollar.

The Reserve Bank said that over the last two months it has undertaken several measures to contain the volatility in the foreign exchange market.

"These measures have had a restraining effect on volatility with a concomitant stabilising effect on the exchange rate," it added.

RBI further said that based on a review of the measures, and an assessment of the liquidity and overall market conditions going forward, it decided to modify the liquidity tightening measures.

RBI said the July 16 instructions regarding the cap on overall allocation of funds at Rs 75,000 crore under LAF stands withdrawn.

The changes in LAF will come into effect from tomorrow.

The new norms on CRR will be effective from the first day of the next reporting fortnight, from July 27.

Source : financialexpress.com