The Reserve Bank of India (RBI) on Thursday eased mandatory cash requirement rules for banks amid fears of liquidity crunch in the system.
The RBI said it had eased the liquidity coverage ratio norms by allowing banks to account for up to two percentage points more of government securities, held in their statutory liquidity ratio reserves.
The development comes after the government on Wednesday hiked import duty on various products that include footwear, washing machines, diamonds, jet fuel air conditioner to reduce current account deficit (CAD) and strengthen the rupee.
To discuss the impact of these developments, CNBC-TV18 spoke with Soumya Kanti Ghosh, chief economic Advisor at SBI and Ananth Narayan, Professor at SPJIMR.
"It seems to be a positive move but at the marginal level it may not impact liquidity to a significant extent because the banks already have excess SLR ... more needs to be done on an incremental basis,” Ghosh said.
"However one of the long standing demands of the banks have been to treat this as securities so that it doesn’t convert to MTM. So if anything is done on this front over a point of time will help ease banking pressure on MTM cover," said Ghosh.
With regards to the import duty hike measures, he said, "It will help sentiment but again not sure how it will help at a margin level on the current account deficit front."
According to Narayan, "It is a clear positive and should do a lot to assuage market sentiment. The RBI seems to be reiterating that is ready to provide ample short-term liquidity but there never has been a shortage of liquidity, it is the tenure of the liquidity which has been a point of contention. However, RBI is not providing durable liquidity".
"The current development does not directly address the stress related to corporate bond markets and redemptions there. At some stage, the RBI and Sebi might have to provide as they did in 2008 a window for providing liquidity against quality corporate bonds," said Narayan.
"It is true that the banks would now have the ability to raise money from the RBI against excess SLR but they necessarily may not immediately want to lend against corporate bonds. All these measures help but does not solve the problem and need a separate solution," said Narayan.
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