INDIA BUSINESS WORLD - MARCH 2006
THE MONTH THAT WAS

RBI FIGHTS LIQUIDITY WOES, HIKES NRI DEPOSIT RATE

MONTHS of liquidity crunch in the money market has triggered off varied responses from the players in the financial sector. The Reserve Bank of India has opened the floodgates to NRI money, while a large bank which underwent a image makeover was found to have fudged deposit figures to wriggle out of a tight liquidity situation.

On Tuesday, well after the market hours, the RBI hiked the interest that banks can give to NRIs on their dollar deposits — a move that is expected to step up dollar inflow and ease liquidity.

However, much to its shock the regulator discovered that a large, Mumbai-headquartered public sector bank has fudged figures to report a lower deposit — something that enabled it to manage the liquidity situation.A lower deposit allowed the bank to dilute its reserve requirements. In other words, it could get away by parking lower than the required 5% cash reserves with RBI and investing less than the 25% (of the demand and time deposits) in government securities.

What surprised the market more was the hike in the return on FCNR (B) or dollar deposits of NRIs. More dollar inflow will make it possible for banks to give dollar loans and swap the dollar into rupees (at a premium) to give rupee loans. Both the transactions will address the liquidity issue.Till now banks could offer 25 basis points below the Libor on NRI dollar deposits. From Wednesday, banks can offer the Libor on such deposits.

Significantly RBI's decision follows the bankers representation to FM on Friday and a subsequent meeting with RBI governor YV Reddy on Tuesday morning.