RBI works to boost up market

Unveiling the package moments after the Reserve Bank of India slashed its key policy rates, the government said it was preparing to recapitalise state-run banks to the tune of twenty thousand crore rupees over the next couple of year to ensure the banking system does not suffer from capital adequacy constraints.

Speaking on the actions, Bharat Dalal, fund manager at Dawnay Day AV Financial Services, said, “Although most of the news has already been factored in, a sentimental boost on the back of the monetary policy is expected next week. A rally up to 3200-3250 on the Nifty is likely, provided 2975 hold. In an extremely optimistic scenario, 3400-3450 could be expected.”

The RBI slashed its two key short-term interest rates by hundred basis points each to stimulate an economy that has been slowing faster than expected. It cut the repo rate, at which it lends cash to banks, to 5.5% from 6.5%.

The reverse repo rate was cut to 4%. RBI announced a cut in cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 basis points to 5% with effect from January 17th 2009.

It allowed the preparation of a special financing entity to provide liquidity support against investment grade paper to non-banking finance companies. The RBI has separately infused three lakh crore rupees liquidity into the system by way of cuts in key policy ratios – CRR and SLR. In addition, RBI provided a eleven thousand crore rupees fund to National Housing Bank and the SIDBI in a bid to promote lending to housing and SME segments.

The government realized the need for a second package as industrial output slipped into negative zone for the first time in fifteen years in October. The Index of Industrial Production fell 0.4% during that month. Exports also shrunk for two months in a row, with November figures showing a 9.9% decline.

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