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RBI ban on Letters of Undertaking: Switch to local credit may squeeze liquidity

Following the Reserve Bank of India’s (RBI) ban on issuance of letters of undertaking (LoU), at least $5 billion (approximately Rs 35,000 crore) of non-fund credit will need to be converted into domestic loans. The total non-fund based exposure is estimated at $20 billion (Rs 1.4 lakh crore). The migration of customers to the home market could soak up a lot of domestic liquidity in the next few months, say bankers who are apprehensive yields might spike up. “We will need to watch liquidity though the higher FPI investment limits will help,” said a banker.

News Source:- http://www.financialexpress.com/economy/rbi-ban-on-letters-of-undertaking-switch-to-local-credit-may-squeeze-liquidity/1134277/