RBI Now Flexible On Cash Reserve Ratio

New Delhi, June 22 (UNI) Law has been amended empowering the Reserve Bank of India to exercise flexibility in setting Cash Reserve Ratio-- a statutory reserve requirement banks are expected to fulfil, it was announced today.

The Reserve Bank of India (Amendment) Bill, 2006, passed by Parliament and signed by President A P J Abdul Kalam has now been notified in the gazette, the Law and Justice Ministry said.

Cash Reserve Ratio is one of two statutory resource requirements for banks, the other being Statutory Liquidity Ratio.

The enactment also empowers India's central bank to set policy directions for agencies handling contracts in respect of government securities, money-market instruments and derivatives, the announcement said.

The Act enables the RBI ''to lay down policy directions to any agency dealing in various kinds of contracts in respect of government securities, money-market instruments and derivatives and inspect such agencies,'' it said.

It also empowers the RBI ''to deal in derivatives and to lend or borrow securities,'' the announcement said.

The Act enables the RBI ''to remove the lower and upper ceiling of Cash Reserve Ratio and to provide flexibility to RBI to specify the CRR,'' it said.

The amendment was considered necessary in view of the steady progress of financial sector reforms in India, it said, noting that Indian financial markets have more products, participants and liquidity than before.

The announcement said that for greater operational flexibility, the RBI needed enabling powers to use a larger variety of financial instruments.

''The volatility in the influx of foreign exchange and the market conditions in a fast-changing economy can be expected to continue in future as the financial sector progresses,'' it said.

The RBI needed the powers ''to cope with any unforeseen eventualities in the future, such as excess or lack of liquidity in the banking system and for an effective conduct of monetary policy.

''There was a need to enable the RBI to determine the CRR for scheduled banks without any ceiling,'' it said, adding that many central banking authorities elsewhere have such powers.

With the conduct of monetary policy becoming more market-based through progressive use of indirect instruments, the RBI needed more flexibility to set the CRR, it said.

Hitherto, the RBI has been delegated powers under the Securities Contracts (Regulation) Act, 1956, to regulate transactions in money marketing and other instruments.

For ''a more effective regulation of the markets for interest rate contracts, including government securities and money market instruments and derivatives, it was necessary to confer specific powers on the RBI,'' the announcement said.

Over-the-counter derivatives have a crucial role in re-allocating and mitigating the risks of corporates, banks and other financial institutions, the announcement said.

It said ''the ambiguity regarding their legal validity has inhibited the growth and stability of the market for such derivatives. It became essential to provide for clear legal validity of such contracts. Hence the Act.'' UNI MJ RP PM1734