India lifts curbs on foreign funds, eases liquidity for banks (Intro Round-up)

October 6th, 2008 - 9:50 pm ICT by IANS  

New Delhi, Oct 6 (IANS) India’s central bank Monday cut the minimum cash balance for commercial banks against deposits by 50 basis points, even as the market watchdog, the Securities and Exchange Board of India (Sebi) removed some curbs on foreign funds earlier in the day.The twin move is not only expected to bring cheer to the equities market, where a key index is languishing at a two-year low, but also improve the liquidity for banks.

The central Reserve Bank of India (RBI) said it is cutting the cash reserve ratio (CRR) for banks by 50 basis points to 8.5 percent in a move that will inject Rs.200 billion (Rs.20,000 crore or $4.44 billion) into the financial system.

The change will be come into effect Oct 11.

“Liquidity management is a priority amidst global certainty,” the central bank said, adding the decision was taken after a “review of current liquidity situation in the context of global and domestic developments”.

“This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,” it added.

RBI had Sep 16 announced certain measures to reduce the pressure on domestic markets as a result of a fallout of global financial turmoil.

“Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained,” RBI said.

Welcoming the RBI move, HDFC Bank chairman Deepak Parekh said it was “very timely and absolutely necessary”.

“At least, it’s a beginning, we need liquidity and RBI has responded positively,” he said.

Motilal Oswal Securities senior vice president of research Manish Sonthalia told IANS: “It is obvious that Rs.180-200 billion will pumped into the money market. As an immediate fallout, the money market will ease a bit.”

Added Yes Bank chief economist Shubdha Rao: “This is a welcome move. We need liquidity in the market. This move will increase liquidity in the market.”

However, Sajjan Jindal, president of industry lobby Associated Chamber of Commerce and Industry, while welcoming the RBI decision, said it would have been better if the the repo rate had also been reduced by as many basis points.

Earlier in the day, Sebi removed some curbs on foreign funds like the 40 percent cap on participatory notes and overseas derivative instruments.

The regulator also decided to review the entire working of foreign institutional investors (FIIs) in the country and said a policy paper will soon be floated to invite comments and suggestions from all stakeholders.

FIIs are feared to have sold over $9 billion worth of equity in Indian stock markets this year, resulting in a drop of over 30 percent in the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) during a 52-week period.

The decisions, taken at a meeting of the Sebi board in Mumbai, were announced by its chairman C.B. Bhave and came even as the Sensex dropped below the crucial 12,000-point mark - its lowest level in over two years - with a fall of nearly six percent.

“We’ve gone back to the pre-October position,” Bhave told a press conference.

Participatory notes or P-Notes are financial instruments used by foreign funds that are not registered with the markets regulator to invest in Indian equities. But their use was curbed in October last year to make trading more transparent.

Meanwhile, the 30-share Sensex was languishing at 11,801.70 points at close to register a drop of a whopping 724.62 points, or 5.78 percent over the previous day’s close at 12,526.32 points.

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