RBI tightens liquidity again; interest rates set to rise

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RBI tightens liquidity again; interest rates set to rise
The Reserve Bank of India (RBI) in its bid to fight the falling rupee has squeezed liquidity again by announcing a fresh set of measures.

The RBI cut the money it lends to banks under the liquidity adjustment facility (LAF) to 0.5 per cent of the deposits of a bank. This is as against 1% or Rs 75,000 crores available for the entire banking system.

"The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL outstanding as on the last Friday of the second preceding fortnight. This measure will come into effect immediately, i.e., from July 24, 2013 and will remain in force until further notice," the RBI has said in a release.

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 per cent of the required CRR on a daily basis. Effective from the first day of the next reporting fortnight i.e., from July 27, 2013, banks will be required to maintain a minimum daily CRR balance of 99 per cent of the requirement.

Both the above measures are meant to drain liquidity from the system, which is estimated at Rs 90,000 crores. As banks have lesser money to lend they may now hike deposit rates and also lending rates.

All eyes would now be on the RBI's forthcoming Monetary Policy scheduled for July 30, in which analysts are now expecting a repo rate hike, as the RBI continues to battle a declining rupee.


Read more about: rbi, repo, laf
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