With rupee recovering from all-time low levels, the RBI today cut the marginal standing facility (MSF) rate, at which it lends emergency funds to banks, by 0.5 per cent to 9 per cent with an aim to improve liquidity and boost economic activities.
The move, which comes ahead of the festive season, is likely to improve liquidity in the system and encourage banks to lend more to consumers.
The Reserve Bank said that on reviewing evolving liquidity conditions and in continuation of calibrated unwinding "it has been decided to...reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9 per cent with immediate effect".
This is the second cut in the overnight interest rate since September 20 mid-quarter monetary policy review when it was lowered to 9.5 per cent from 10.25 per cent.
The RBI had taken many steps in mid-July, including raising the MSF by 2 per cent to 10.25 per cent, to curb volatility in the rupee-dollar exchange rate.
The rupee, however, continued to plunge new depths and touched its lifetime low of 68.85 a dollar in late August.
The domestic currency has since then recovered and is trading at 61-level now. The rupee closed at 61.79 against the US dollar at Inter-bank foreign exchange market on Sunday.
MSF allows banks to borrow money from the central bank at a higher rate when there is a significant liquidity crunch.
The RBI further said it conducted open market purchase operations of Rs 9,974 crore today with the aim of injecting liquidity into the system.
It also said it will provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions every Friday, starting October 11.
Last month, the RBI said it injects about Rs 1.5 lakh crore into the system daily through the liquidity adjustment facility, the export credit refinance facility and the MSF.
With the reduction in the MSF rate, the bank rate too has adjusted to 9 per cent with immediate effect.
Earlier in the day, RBI Deputy Governor H R Khan said the central bank will look at easing curbs on the forex futures market once stability improves in the foreign exchange market.
"Once the stability improves in forex market, we will look at the whole gamut of futures market," he said on the sidelines of an event here.