LS clears RBI (Amendment) Bill

New Delhi, May 17 | Updated: May 18 2006, 05:30am hrs
The Lok Sabha on Wednesday passed the Reserve Bank of India (Amendment) Bill. The amendment would give RBI the flexibility to set the cash reserve ratio (CRR) requirement for banks below 3%. Bank scrips surged on the news, presumably in the hope that the central bank would move faster to lower the CRR which is currently 5%.

Replying to questions raised in Parliament, finance minister P Chidambaram said, The RBI will be armed with greater autonomy and authority to deal with subjects under the Act.

Section 42(1) of the RBI Act stipulates that banks have to maintain cash balances with the RBI within 3-20% of their time and demand liabilities. The RBI does not have the powers to reduce the CRR below 3%.The Bill also seeks to empower the RBI to deal in repo, reverse repo and derivatives and validate over-the-counter derivative contracts.

Bankers expect that greater flexibility in setting CRR would make it possible for RBI to encourage greater credit offtake. This would also result in better liquidity management in the system.

The amendment to the Act is also expected to remove ambiguity in trading in derivatives market. The derivatives market has experienced a quantum rise in volumes in the recent past. The absence of a legal status to derivatives contracts had, however, restrained players in actively participating in the market.