By 15 October, 2008

The Reserve Bank Of India will hold an additional 14-day money auction to help banks meet the cash requirements of mutual funds that are facing higher redemptions from investors. The Central bank will a 14-day securities repurchase auction every day until it meets its target of adding 200 billion rupees ($4.2 billion).

In an attempt to ease liquidity in the mutual fund sector, it was only yesterday that RBI added Rs 35 billion  at 9 percent, accepting all of the four bids made at the auction. The bank earlier said it was prepared to add as much as 200 billion rupees.

The Reserve Bank of India has been pumping in liquidity into the system and local banks have been borrowing at least Rs 70,000 crore on an average over the past three weeks under its liquidity adjustment facility (LAF). Even so, liquidity has been drying up. Under its latest move, it has allowed banks to extend loans to mutual funds, accepting short-term debt securities issued by lenders as collateral, temporarily easing regulations on lending as part of efforts to boost funds in the financial system.

These conditions are worrisome for India. The Asian Development Bank (ADB), down-scaled the growth expectations of many Asian economies, including India’s, in its half yearly report: .

The ADB attributes this to the worsening conditions in major industrial economies that will weaken demand for goods and services. “The myth of uncoupling has been exploded”, the report says.

India’s GDP growth estimate for the current fiscal (2008-09) has been downgraded from 8 per cent to 7.4 per cent and, for the next financial year (2009-10), from 8.5 per cent to 7 per cent.

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