Worried over a spike in interest rates in the wake of steps to support the falling rupee, the RBI on Tuesday announced a slew of measures, including Rs 8,000 crore bond buyback, to ease liquidity and ensure adequate credit flow to the productive sectors of the economy.
The Reserve Bank will conduct open market purchase of government bonds of Rs 8,000 crore on August 23 to inject liquidity, the central bank said in a statement. More Open Market Operations (OMO) would be undertaken as and when required, it added.
The measures are aimed at addressing the liquidity problem in the market which has worsened after RBI's money tightening steps, including raising short-term rates, to curb volatility in the exchange rate of rupee.
The RBI further said the hardening of long-term yields "has resulted in banks incurring large mark-to-market (MTM) losses in their investment portfolio ... these MTM losses are partly resulting from abnormal market conditions and could be expected to be largely recouped going forward".
The RBI has also decided to retain the statutory liquidity ratio (SLR), the portion of total deposits banks are required to park in G-Secs, at 24.5 per cent to help banks reduce MTM losses resulting from abnormal market condition.
With regard to SLR requirement, RBI said it has now been decided to relax this requirement by allowing banks to retain SLR holdings in Held To Maturity (HTM) bonds category at 24.5 per cent until further instructions.
"Banks have the option of valuing these securities for the purpose of such transfer as at the close of business of July 15, 2013," it said.
"It is important to address the risks to macroeconomic stability from external sector imbalances. At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy," it said.
Earlier in the day, rupee plunged to sub-64 level before recovering to end the day at 63.25 against dollar. Bond yields crossed 9 per cent mark, the highest in five years, resulting in significant MTM losses for banks.
Earlier on July 15, the RBI had announced liquidity tightening measures in order to raise the short-term interest rate and thereby curb volatility in the exchange rate.
"A review of these measures suggests that the immediate objective of raising the short term interest rates has substantially been achieved as evidenced by the money market rates anchoring to the marginal standing facility (MSF) rate of 10.25 per cent," RBI said.
Despite the measures taken by the RBI, the volatility in exchange rate has continued and the Rupee in today's trade touched all time low of 64.13 to a dollar in intra-day trade.
The RBI said going forward it will calibrate the issue of cash management bills (CMBs), including scaling it down as may be necessary, to keep the money market rates around MSF rate until the volatility of rupee eases.
Earlier this month, RBI had announced Rs 22,000 crore (Rs 220 billion) sale of short term securities every Monday to suck out liquidity from the system.
Further, banks will now be allowed to transfer SLR securities to HTM category from available for sale (AFS)/held for trading (HFT) categories up to the limit of 24.5 per cent as a one-time measure, it said.
In addition, banks can spread over the net depreciation, if any, on account of MTM valuation of securities held under AFS/HFT categories over the remaining period of the current financial year in equal instalments.