India’s central bank moves to free another $200 bn

October 14th, 2008 - 1:32 pm ICT by IANS  

Mumbai, Oct 14 (IANS) A day after asking commercial banks not to withhold credit to the corporate sector, especially small firms, the Reserve Bank of India (RBI) Tuesday said another Rs.200 billion ($4.18 billion) would be released for the needs of mutual funds.The central bank said it would conduct a special 14-day repo (repurchase of securities) at a coupon rate of nine percent for a notified amount of Rs.200 billion to enable banks meet the liquidity requirements of mutual funds.

The banking regulator had earlier reserved the right to conduct such auctions - where government securities are bought back to release cash into the financial system - depending on market conditions.

The move comes on the back of a cut of 150 basis points over the past week in the cash reserve ratio, or the minimum cash banks have to retain against deposit, which was estimated to free some Rs.600 billion for corporate credit.

The central bank also asked commercial banks not to withhold working capital requirement of small and medium enterprises, especially where the amounts were previously approved based on prudent norms and their creditworthiness.

Finance Minister P. Chidambaram as well as RBI Governor D. Subbarao have been saying necessary steps will be taken from time to time so as not to starve stakeholders of funds.

“The problem has been identified as liquidity,” the finance minister said, emphasising that the Indian economy was predicted to grow at a robust pace, the invest rate was high and tax collections were on the rise.

His comments, along with the positive developments in the global markets, had lifted a key Indian equities index by nearly 800 points, or over seven percent, Monday with the mood getting a further boost with calming statements by a panel on liquidity crisis chaired by Finance Secretary Arun Ramanathan.

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