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RBI eases cash reserve rules
Why in the news ?
- The Reserve Bank of India allowed banks to dip further into statutory liquidity ratio (SLR) reserves in a bid to provide more liquidity in the financial markets hit by the IL&FS group defaults.
More in the news
- RBI decided to allow banks to dip into their SLR reserves by another two percentage points to meet liquidity coverage ratio (LCR) norms.
- The central bank said that banks could ‘carve out’ up to 15% of holdings under SLR to meet their LCR requirements compared with 13% earlier.
- Banks’ SLR, which is the percentage of deposits that they have to mandatorily invest in government and state government securities, is currently at 19.5 per cent.
- The RBI move follows concerns over tight liquidity conditions and banks’ unwillingness to lend to NBFCs.
- Concerns of liquidity crunch were triggered following defaults by the IL&FS group which spread to non-banking financial companies (NBFCs), roiling the financial markets.
- RBI said it conducted open market operation (OMO) on September 19 and provided a liberal infusion of liquidity.
Concepts
Statutory Liquidity Ratio :
- It is a monetary policy instrument of the RBI.
- Under SLR, commercial banks have to keep a certain proportion of the demand and time deposits as liquid assets in their own vault.
- Liquid asset means assets in the form of cash, gold and approved securities (government securities).
Open Market Operations (OMO’s) :
- Major monetary policy instrument of the RBI.
- It refers to the buying and selling of eligible securities or first class bills (govt. securities) by the RBI.
- Buying of securities in the open market increases the supply of credit.
- On the other hand selling of securities reduces the volume of money with the public.
Source
Indian Express.