Marginal Standing Facility (MSF), the rate at which banks borrow funds overnight from Reserve Bank of India (RBI) against approved Government securities, were on Monday reduced to 9 per cent from 9.5 per cent with the aim of improving liquidity in the system.
“It has been decided to reduce the MSF rate by a further 50 basis points from 9.5 per cent to 9 per cent with immediate effect,” the RBI said.
The cut comes after a review of evolving liquidity conditions and in continuation of its calibrated unwinding of exceptional measures taken since July, the central bank said.
This is the second reduction in the rate since the September 20 mid-quarter monetary policy review, when it was lowered to 9.5 per cent from 10.25 per cent.
The RBI took steps in mid July, including raising the MSF rate by 2 per cent to 10.25 per cent, to tighten liquidity in an attempt to curb volatility in the rupee-dollar exchange rate. MSF allows banks to borrow money from the central bank at a higher rate when there is a significant liquidity crunch.
It conducted open market purchase operations of Rs 9,974 crore during the day with the aim of injecting liquidity into the system.
MSF came into effect in May 2011 where currently banks avail funds from the RBI on overnight basis against their excess statutory liquidity ratio (SlR) holdings.
Meanwhile the central bank also said it will provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTl) of the banking system through variable rate auctions every Friday, starting October 11.
The notified amount and tenor of the term repo auctions will be announced prior to the auction dates.
last month, the RBI said it injects about Rs 1.5 lakh crore into the system daily through the liquidity adjustment facility, the export credit refinance facility and the marginal standing facility.
With the reduction in the MSF rate, the RBI also announced that the bank rate will be adjusted to 9 per cent with immediate effect.
“The bank rate also stands adjusted to 9 per cent with immediate effect,” the central bank said in a statement.
Bank rate is the rate at which the RBI lends money to banks. The RBI, in another statement, said the central government has announced the sale of four dated securities for Rs 15,000 crore on October 11. The auctions by the RBI will be conducted using uniform price method.
The result of the auctions will be announced on the same day and payment by successful bidders will be on October 14.
The Government has plans to borrow Rs 2.35 lakh crore from the market through dated securities in the second half of the current fiscal.
Meanwhile, Reserve Bank on Monday said it will look at easing restrictions on the forex futures market once stability improves in the foreign exchange market.
“Once the stability improves in forex market, we will look at the whole gamut of futures market,” RBI Deputy Governor HR Khan said on the sidelines of an event here.
During the morning session, the rupee fell by 21 paise to 61.65 against the dollar due to demand from importers for the US currency.
The local currency had hit an all time low of 68.85 against the dollar on August 28.
“As things stabilise, we will look at more and more relaxations. For examples, in OTC (Over-the-Counter) market, there is requirement of documentations for the underlying. For up to certain small values, we may think that documentation requirement (such cases) can be done away with,” he said.
Khan said RBI is in talks with Securities and Exchange Board of India (Sebi) on making the dollar-rupee OTC and futures market trades possibly on a delivery basis.
“Going forward, the best idea is to harmonise both OTC and futures market, both can possibly be delivery-based. We are in discussion with Sebi and going forward will look at this,” Khan added.