RBI's fire-fighting move, lowers repo for Mutual Funds

New Delhi: The Reserve Bank of India wants to set the on-coming economic crisis right lest it become large and steamrolls the lifting markets.

The RBI has taken takes further steps to address the liquidity issue by holding a special 14-day repo.

24 hours after the Finance Minister hinted at further steps to ease liquidity, the Reserve Bank of India announced a special 14 day repo to enable banks to meet mutual funds liquidity needs.

The special repo will be at 9 per cent per annum that will pump Rs 20,000 crore in the Mutual Fund market. The move comes at a time when Mutual Funds are already facing redemption pressure.

“Like everything else we have seen some outflows from Mutual Funds and also some larger investors pulling money out for various reasons like seasonal, meeting their requirements etc and that has put a little pressure on liquid funds in general and therefore to that extent there was a little pressure in terms of meeting redemptions,” said Head of Investments at IDFC Mutual Funds, Rajiv Anand.

“We have essentially seen the RBI put its foot on the accelerator in terms of policy response. We will see further CRR cuts. I wouldn't disagree but it could be up to a 100 bps of repo rate cuts in the pipeline as well. From the currency perspective we will see further pressure on the rupee. Our target by year end is $51-52,” said the Head of Research, Emerging Asia- Barclays Capital, Peter Redward.

The shortage in liquidity in the system continues to be around Rs 40,000 crore even after the reduction in CRR has come into effect.

Acknowledging that the RBI announcement will augur well for the markets, CII has again reiterated its earlier demand for a comprehensive cut in the repo rate by 100 - 150 bps, which is needed to fuel demand.

Financial experts are waiting for much more. “There are still some more steps to be taken,” said Sudip Bandhopadhyay.

Repo rate is the key rate at which RBI provides short-term liquidity to banks and when that is lowered, it automatically brings down commercial interest rates.

The RBI governor D Subbarao cut short his US trip and met the Prime Minister on Tuesday evening. All eyes are now set on announcements that may follow as a result of that crucial meeting.

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