India’s RBI Announces Measure to Ease Bank Liquidity Shortage

(Bloomberg) -- India’s central bank announced a measure that will allow banks more access to funds as it moved to ease a liquidity squeeze afflicting the nation’s money markets.

The Reserve Bank of India increased the facility to avail funds for liquidity coverage ratio to 13 percent from 11 percent, effective Oct. 1, according to a central bank statement on Thursday. The increase will take the carve out from the statutory-liquidity ratio that is available to banks to 15 percent of their deposits. The central bank also said that it stands ready to meet the durable liquidity requirements of the system.

India’s central bank has been prompted to buy rupees in the currency markets to shore up Asia’s worst-performing currency at a time when a rare default in the credit market is tightening money supply. Thursday’s move comes following the worst cash crunch in India’s banking system in more than two years.

“It appears that the RBI is getting proactive in terms of infusing liquidity through various channels and should help front-end rates,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “This effectively means that more SLR bonds can be used to borrow liquidity from banking system.”

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