MUMBAI The Reserve Bank of India said on Thursday it will actively inject additional cash into the banking system in March, when liquidity conditions tend to tighten because it marks the end of the fiscal year.
The cash injections could come in addition to the current term repo system that provides cash to banks as short-term loans under the RBI's Liquidity Adjustment Facility (LAF).
The RBI also said it would allow standalone primary dealers to borrow via term repos, but only for the second half of March. Right now only financial firms with mandatory reserve requirements such as banks are allowed to participate.
"The Reserve Bank of India will inject adequate additional liquidity using a combination of appropriate instruments, while continuing with its normal Liquidity Adjustment Facility (LAF) operations," it said in a statement.
The announcement comes two days after RBI Governor Raghuram Rajan met bankers to solicit their views on liquidity after cash conditions tightened significantly since December due to slow government spending.
Liquidity tends to worsen in March because banks conserve cash at the end of the fiscal year and because of tax outflows.
The RBI has thus conducted 300 billion rupees ($4.39 billion) worth of bond purchases since December, a step it has previously been reluctant to take.
Tight cash condition has been one of reasons cited by banks for their inability to lower lending rates even after the RBI cut its repo rate by 125 basis points last year.
Separately, the RBI said on Thursday it eased the requirements for banks to meet its liquidity coverage ratios under Basel III. See: bit.ly/1PoiMul
($1 = 68.3600 Indian rupees)
(Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam)
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