RBI assures rupee and forex liquidity to counter volatility

RBI assures rupee and forex liquidity to counter volatility

In a statement, RBI said it had sufficient liquid reserves to meet demand for forex even in stress situations.  This statement followed a downgrade in US rating by Standard & Poor's which rattled investors across global markets.

Accordingly, rupee liquidity is being provided through the Repo window of the Liquidity Adjustment Facility (LAF), while on forex liquidity, the central bank has made an assessment as per which they have sufficient liquid reserves to meet the demand for forex even in stress scenarios, it said.

Also, RBI is closely monitoring all key indicators and will continuously assess the impact of global developments on Rupee and forex liquidity and macroeconomic stability. "We will respond quickly and appropriatelyto the evolving situation."

Further, the apex bank said developments relating to the US economy last week have significantly increased uncertainty about its prevailing condition. A sharp fall in US equity markets on Thursday was followed by a downgrade in the long-term US sovereign rating by rating agency Standard & Poor’s from AAA to AA+ with negative outlook on Friday. 

Two other rating agencies, Moody’s and Fitch, had recently maintained their AAA rating, but suggested that this could change.

The downgrade has raised concerns of continuing turmoil in global financial markets, as investors re-allocate portfolios in response to heightened risk perceptions that arose from both developments.

As Friday’s market behaviour demonstrated, India is not insulated from such developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors.

While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact. However, the policy and regulatory framework must anticipate and be prepared to respond to turbulent financial market conditions arising out of external developments.

Currently, the banking system does not face any liquidity pressures as evident from the low level of dependence on liquidity injections under the LAF.

In any case the banking system currently has an adequate stock of Statutory Liquidity Ratio (SLR) securities, which are eligible for Repo transactions.

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