How RBI plans to stop rupee from sliding further

The Reserve Bank of India on Tuesday announced further measures to tighten banking system liquidity and to stabilise the falling rupee.

The RBI set the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 per cent of deposits, outstanding as of the last Friday of the reporting cycle two weeks prior to the current one.

The central bank also said banks need to maintain 99 per cent of their daily cash reserve ratio requirements with the RBI, as against 70 per cent now.

This measure takes effect from the two-weekly period starting July 27.

CRR is portion of deposits that banks are required to keep with RBI.

According senior bankers, the measures could suck out Rs 4,000-Rs 5,000 crore (Rs 40-50 billion) from the system.

The additional measures to check exchange rate volatility comes within 10 days of RBI taking stern steps to suck out liquidity from the system.

On July 15, the RBI had raised short term interest rates and announced to sell government securities worth Rs 12,000 crore (Rs 120 billion). However, it raised only 2,532 crore (Rs 25.32 billion) from the open market sales (OMS) on July 18.

The Bank said that over the last two months it has undertaken several measures to contain the volatility in the foreign exchange market with a concomitant stabilising effect on the exchange rate.