The Reserve Bank of India (RBI) will bring down reserve requirements for Indian banks as they gear up to meet tougher global capital preservation rules, according to the RBI governor D Subbarao.

The move is to enhance money supply in the banking system as they gear up to bring in Basel III rules by April 2013, which would lead to all Indian banks set aside additional capital. The RBI hopes to free up the existing reserve ratios so that the money supply will not be impacted.

While addressing a symposium organised by the Indian Institute of Foreign Trade in Mumbai, the RBI governor said the central bank would move towards bringing down the reserve ratios in a gradual and calibrated manner. “India will also move towards full capital account convertibility,” said the governor.

Basel-III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. It will strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and bank leverage.

Though the total quantum of additional liquidity that banks will have to cough up to migrate to Basel III is still to be ascertained, it will be relatively high, according to bankers.

Indian banks are now required to hold 24 per cent of the net assets and liabilities in government securities — statutory liquidity requirement (SLR) and six per cent as a Cash Reserve Ratio (CRR) as a liquidity buffer with the RBI for any financial crisis.

“Before the reforms in 1991, Indian banks had a reserve requirement of 65 per cent, but gradually, we have brought it down to 30 per cent including SLR and CRR,” the governor said.

During the pre-reform era, about 65 per cent of the money of the banking system was taken away by the government and even with the remaining liquidity there was a prescriptive lending wherein banks where asked whom to lend and at what rates to end. “The reserve requirement is still high,” the governor added. Besides this, the RBI is also planning to launch Inflation indexed bonds. These are floating rate bonds linked to the inflation rate help investors a protection of any volatility in the movement of yields in the government bonds market. It will also help the government borrowing programme to be smoother. “We intend to launch these bonds shortly,” Subbarao told reporters at the sidelines of the symposium.

On the euro zone crisis and the US debt impasse, the governor said that any global development would have an impact on the Indian economy as India’s financial systems are linked to the global financial systems. “The decoupling theory no longer holds in the globalised world,” he said.

“Managing policy in a globalised world, preserving financial stability and financing the $1 trillion infrastructure requirement in the next five years are the main challenges facing the RBI,” the governor said. While on the current account, India is fully convertible yet to achieve full capital account convertibility.

“Progressing to full capital account convertibility will help us access the foreign savings, and the government will be forced to be financially disciplined but the other side is that the economy will be exposed to vulnerable inflow and outflow of capital,” the governor added.