Volume - 6

RBI Steps to Protect the spread of the Bankruptcy

Lehman Bros. Filed bankruptcy papers !!
Dollar to Rupee rate shoots to Rs 47 !! All eyes on AIG !!

Liquidity crunch in India surges overnight call money rates to 16% !! Goldman’s record 70% drop in quarterly net profit.!!

To protect from the spread of the bankruptcy inferno to Indian financial services RBI Steps In to Soothe Frayed Nerves with measures

1) To support the rupee against the dollar and
2) Supply cash in the money market to dampen the overnight call money rate.

On Tuesday the 17th Sept.2008 Mr. Subba Rao RBI Governor has come out with package of moves like

· RBI “will continue to sell dollar through agent banks to augment supply in the domestic forex market or intervene directly to meet any demand-supply gaps.”
· RBI has hiked the maximum interest that banks can pay on NRI deposits by 50 basis points for dollar as well as rupee deposits. Once the currency market stabilizes, this could prompt many NRIs to park more deposits with banks in India — something that RBI is banking on to increase dollar inflow. The 50-basis point increase in interest rates on foreign currency non-resident and non-resident (external) accounts, targeted at NRI depositors, also seems to be a move to stimulate inward remittances and shield the rupee.
· The RBI is also considering the option of relaxing the cap on external commercial borrowings.

· RBI has temporarily allowed banks to borrow from it even if they don’t have idle government securities lying as reserves with RBI. This can be up to 1% of their net deposits. Under normal circumstances, a bank can borrow only if it has securities in excess of 25% of net deposits with RBI. Now, it can use 1% of this to borrow, and even if actual reserves slip to 24%, no penal interest will be charged. This amounts to an indirect cut in the statutory liquidity reserves (SLR) from 25% to 24%, and could enable banks to raise up to Rs 10,000 crore.

· Over and above this, banks can now borrow twice a day from RBI’s repo window at 9%. This will help many banks which are forced to borrow at 12-16% in the inter-bank market. This liquidity adjustment facility, which was introduced to inject more liquidity in system on every reporting Friday (every week), will be opened up daily to pump more liquidity in the current scenario.

· RBI has barred Lehman’s Indian arm from remitting money to the parent, while Japan’s Financial Services Agency has ordered Lehman to retain sufficient assets in Japan to cover its liabilities in the country.

Now on one side RBI has taken measures to curb liquidity to control the rising inflation but now is forced to protect the Indian industries from getting into red for want of liquidity the blood supply.

One has to seriously think upon the following two questions

1. What could be the outcome of these two contra measures taken by RBI?
2. Will there any impact of the events in Lehman and Merrill Lynch on Indian equities?

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