The Reserve Bank of India announced a slew of measures to attract foreign currency deposits and boost liquidity to mutual funds, non-banking finance companies and exporters.
The move comes after the central bank cut interest rates twice in less than a month to shield the economy from the global slowdown.
On Saturday, it raised the interest rate on foreign-currency deposits by 75 basis points with immediate effect and extended until March the special repo window to meet the liquidity requirements of mutual funds and non-banking finance companies.
"There are indications the global slowdown is deepening with a larger than originally expected impact on the domestic economy,"' the central bank said. "In the context of the developments, further augmenting the rupee and forex liquidity, strengthening credit delivery mechanisms and improving credit delivery are imperative for sustaining the growth momentum."
The interest rate ceiling on foreign currency non-resident (B) deposit is now pegged at the Libor rate plus 100 basis points from an earlier cap of 25 basis points. The bank also raised the interest rate cap on non-resident rupee accounts by 75 basis points to the Libor rate plus 175 basis points.
The announcement comes after the central bank cut its benchmark lending rate twice since October 20, lowering it to 7.5 per cent from a seven-year high of 9 per cent. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month.
The bank also allowed housing finance companies to raise short-term foreign-currency loans. This is a temporary step only available to companies registered with the National Housing Bank. LIC Housing Finance CEO RR Nair said this was a welcome measure as the cost of raising funds through this route was lower than domestic borrowings at this point.
In yet another step, RBI said it would consider proposals from Indian companies to buy back foreign-currency convertible bonds. The buyback will be financed by the company's foreign currency resources held in India or abroad and/or out of fresh external commercial borrowing.
These proposals will be considered under the approval route of the RBI. The extension of FCCBs will be permitted at the current all-in cost for the relative maturity.
To help exporters fight the slowdown in demand from the US, the central bank agreed to extend the period for rupee loans to 270 days from 180. At present, this credit is available at a concessional interest rate ceiling of the benchmark prime lending rate minus 2.5 percentage points.
It enhanced the eligible limit for commercial banks to get external currency refinance. The limit has been raised to 50 per cent of outstanding export credit from the earlier limit of 15 per cent. This will provide additional liquidity support of about Rs 22,000 crore (Rs 220 billion).
To meet the credit demand of small and micro industries and the housing industry, the central bank said Small Industries Development Bank of India and National Housing Bank would get Rs 2,000 crore (Rs 20 billion) and Rs 1,000 crore (Rs 10 billion), respectively.
The bank also reduced the risk provisioning for the commercial real-estate industry to 100 per cent from 150 per cent. All unrated claims on companies will attract a uniform risk weight of 100 per cent as against the risk weight of 150 per cent for such exposures prescribed earlier, which was applicable to exposures above Rs 50 crore (Rs 500 million) from April 1, 2008 and for exposures above Rs 10 crore (Rs 100 million) from April 1, 2009.
The standard asset provisioning requirements of banks have been reduced to 0.40 per cent from 2 per cent, except in case of direct advances to the agriculture and SME sector, where the provisioning requirement is 0.25 per cent.
Similarly, claims on rated as well as unrated non-deposit taking systemically important non-banking financial companies (NBFC-ND-SI) should have a uniform risk weight at 100 per cent.
However, there will not be any change for the claims on asset financing companies. They will continue to be governed by the credit rating of AFCs, except the claims that attract a risk weight of 150 per cent under the new capital adequacy framework, stands reduced to a level of100 per cent.
"The Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate," an RBI statement said.