Liquidity tightening measures by the central bank will affect banks’ ability to use the repo window. These measures aimed at curbing forex speculation against the Indian rupee are unlikely to have a large negative effect on banks, says Nomura
Nomura Equity said it believes that the sudden move to tighten liquidity in the system, by the Reserve Bank of India (RBI), will only impact net interest margins (NIMs) by three to four basis points (bps), which is marginal. Nomura, in a report said, “In addition to more liquidity tightening for banks at the margin, a rough calculation suggests an average impact of approximately 3-4bps on NIMs due to the increase in minimum daily CRR balance to 99% from 70% earlier.”
The RBI in a panic move of sorts to curb speculation on the rupee and prevent banks from betting against the rupee, announced a series of drastic measures. The first measure is to its liquidity adjustment facility (LAF). The overall limit for access to LAF by each individual bank is set at 0.5% of its own net demand and time liabilities (NDTL) outstanding as on the last Friday of the second preceding fortnight.
The second drastic measure is adjustment and hiking the cash reserve ratio (CRR) requirements on a daily basis to a whopping 99%! According to Nomura, currently, banks are allowed to maintain their cash reserve ratio (CRR) prescribed by the RBI on an average daily basis during a reporting fortnight, with a minimum of 70% of the required CRR on a daily basis. Effective from the first day of the next reporting fortnight from 27 July 2013, banks will be required to maintain a minimum daily CRR balance of 99% of the requirement.”
In other words, banks will have less money in their reserves to make use of the repo window. Nomura feels that RBI is targeting the repo window to prevent sell off in domestic market. “Measures were aimed at curbing the use of the system liquidity to speculate against the INR at the aggregate sector level. Today's measures aim at taking the liquidity tightening one step further by forcing all banks to hold greater cash reserves (effectively) and also restrict their borrowing at the repo window,” said the Nomura report to clients.
Rather than targeting individuals, the RBI is targeting the corporate sector who make use of the repo window for their daily transactions and positions.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
