“This will restrict speculative tendencies of the market and will create a regulatory activity on traders and speculators to open big positions,” Jagannadham Thunuguntla, equity head of Nexgen Capital said. Currently, the limit for the margin requirement in derivative products is 5%.

1. Liquidity, confidence booster for markets
While RBI, finance minister seek to infuse liquidity in the system, Sebi
moves to clamp down on short-selling
Anita Bhoir, Nesil Staney and Asit Ranjan Mishra
Mumbai / New Delhi: Acting in concert, the finance ministry, the Reserve Bank of India (RBI) and the Securities and
Exchange Board of India (Sebi) unveiled a string of measures on Wednesday to increase liquidity in the system and
boost investor confidence.
Bankers, however, say that even these may not be enough to ease the liquidity crunch in the system and boost
investor confidence.
The measures announced included a 100 basis points reduction by RBI in the cash reserve ratio (CRR) that
determines the cash balance banks need to keep with the central bank, with retrospective effect from Saturday, 11
October. With this, RBI has cut CRR by an unprecedented 250 basis points to 6.5% in one shot, freeing up Rs1
trillion. One basis point is one-hundredth of a percentage point.
The banking regulator also announced additional liquidity support for mutual funds (MFs) by allowing banks to keep
23.5% of their deposits in government bonds. Although RBI dubbed it as a “purely temporary measure”, the move
amounts to a cut in banks’ statutory liquidity ratio (SLR).
Under Indian banking laws, banks are currently required to invest 25% of their deposits in government bonds in the
form of SLR. They use the excess investment in such bonds as collateral to get funds from RBI. This means that if a
bank does not have excess SLR investments, it cannot avail RBI funds. On 16 September, RBI had brought down the
requirement to 24% and on Wednesday, 23.5%. RBI for MFs that are facing Banks will use the headroom to borrow
money from redemption pressure. On Tuesday, RBI opened a Rs20,000 crore liquidity window for MFs.
Chidambaram announced a doubling in the In New Delhi, finance minister P. investment ceiling for foreign
institutional investors (FIIs) in corporate debt to $6 billion (Rs29,040 crore); recapitalization of banks that have less
than 12% capital adequacy ratio; and fast-track reimbursement to public sector banks for the Rs66,500 crore of farm
loans they waived earlier this year.
All these measures were announced after market hours.
Earlier, India’s bellwether stock index, the Sensex, slumped about 5.9%, or 674 points, to 10,809 after a two-day
relief rally. Most Asian markets closed in the red and European markets fell in early trade. US markets opened weak
too and the Dow Jones Industrial Average was trading around 400 points down at 9pm India time.
Steps taken by European and Asian governments— ranging from bailout packages to credit guarantee for banks—
did help over the past two days in easing inter-bank lending rates and soothing panic-stricken investors, but by
Wednesday, market participants in India started feeling RBI’s Rs60,000 crore cash release through a CRR cut and a
Rs20,000 special window for MFs were not enough.

2. Sebi action
Meanwhile, capital market regulator Sebi moved to clamp down on a parallel offshore market for short-selling Indian
securities by foreign investors, who lend and borrow stocks through available stock inventory of participatory notes
and may be contributing to the fall in markets. A Sebi release said sales in the Indian market by FIIs and their sub-
accounts are also possibly on account of the securities being lent by them or sub-accounts abroad.
“To lend more transparency to the market, it has been decided that the position of the securities lent by these entities
abroad shall be disseminated on a consolidated basis twice a week, i.e. on Tuesday and Friday of every week,” Sebi
said.
According to a senior Sebi official, who did not want to be named, the regulator is collecting the details of such
activities and FIIs are expected to furnish data even if they are doing such business overseas, beyond Sebi’s
jurisdiction.
Sebi also raised the margin requirement for exchange-traded equity derivatives. “With a view to ensure market safety
and safeguard the interest of investors, it has now been decided that the exposure margin shall be higher of 10%, or
1.5 times the standard deviation,” Sebi said.
“This will restrict speculative tendencies of the market and will create a regulatory activity on traders and speculators
to open big positions,” Jagannadham Thunuguntla, equity head of Nexgen Capital said. Currently, the limit for the
margin requirement in derivative products is 5%.
Chidambaram said the government would be sending an advisory to banks to restart their credit operations, which
had been suspended after the global meltdown. He also said that at the request of government, RBI has agreed to
provide Rs25,000 crore to the lending institutions immediately to reimburse part of the money they waived for farm
loans.
The government is also setting up a mechanism that will enable Indian banks to raise their capital adequacy ratio, or
the ratio of a bank’s capital to its risk-weighted assets, a key indicator to financial strength, to 12%. “The details of the
capitalization scheme are being worked out,” the finance minister said.
also raised interest on Apart from releasing cash through the CRR cut, RBI several categories of foreign deposits,
including those by RIs (non-resident Indian; by 50 basis points), and so-called FCNR(B) ones (by 25 basis points) to
attract foreign money even as the FII inflow is drying up.
After pumping in $17.36 billion into the Indian equity markets last year, FIIs have pulled out some $11 billion so far
this year.
In yet another move to raise banks’ ability to borrow overseas, RBI allowed Indian banks to borrow funds from their
overseas branches, up to 50% of their equity or $10 million, whichever is higher, against the existing limit of 25%.
anita.b@livemint.com
PTI contributed to this story.