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RBI re-introduced liquidity easing measures to prevent disruption in financial
November, 10th 2010

The Reserve Bank of India re-introduced liquidity easing measures to prevent disruption in financial markets and maintain credit flow in the system as rising government cash balances lead to cash shortage.

A second liquidity adjustment facility (LAF) will be operational till December 16 and banks will be exempt from penalty up to a percentage point fall in the statutory liquidity ratio of 25%, the central bank said in a statement. It also made borrowing against corporate bonds more attractive.

The Reserve Bank has taken a number of steps, including open market operations , to alleviate liquidity pressure, said the statement. Even then, liquidity pressure continues reflecting the governments cash balances and other frictional liquidity demand.

Banks faced a shortfall of over . 1.13 lakh crore and borrowed overnight money at 6.25% from RBI on Monday and Tuesday. Banks borrowed overnight money market at 7.10%, much higher than 6.50% they paid a day ago, reflecting the crunch of funds in the system.

Although the central bank prefers shortage in the system as part of its policy to contain inflation, abnormal squeeze in the past has led to easing measures. This is the third such move in the past few months. The governments unspent revenue of . 75,000 crore is with RBI as on October 22, according to a central bank report .

Liquidity may tighten further since many state-run firms such as Power Grid, Sail, IOC, ONGC Shipping Corp and Hindustan Copper are looking at raising equity from the capital market.

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