down to 5 per cent. to overcome the problem of availability of collateral of government securities for availing of laf, a special refinance facility was introduced in october 2008 to enable banks to get refinance from the rbi against a declaration of having extended bona fide commercial loans, under a preexisting provision of the rbi act for a maximum period of 90 days. the statutory liquidity ratio requiring banks to keep 25 per cent of their liabilities in government securities was reduced to 24 per cent. these actions of the rbi since mid - september 2008 resulted in augmentation of actual / potential liquidity of nearly $ 50 billion. financial stability objective – rbi ’ s response the immediate result of tightening of the money and credit markets in october 2008 created demands on banks that were already expanding credit well beyond the resources raised from the public by way of deposits. companies which were substituting overseas credit and capital market sources with bank funds started withdrawing funds parked with mutual funds and utilising their undrawn limits with banks. some of the companies that had issued commercial paper in the market – especially the real estate companies and the non banking companies – found it difficult to roll over the maturing paper. the commercial paper and certificates of deposit markets became illiquid and mutual funds started facing severe redemption pressures. hence, in the interest of maintaining financial stability, the rbi instituted a 14 - day special repo facility for a notified amount of about $ 4 billion to alleviate liquidity stress faced by mutual funds, and banks were allowed temporary use of statutory liquidity ratio ( slr ) securities for collateral purposes for an additional 0. 5 per cent of net demand and time liabilities exclusively for this. subsequently, this facility was extended for non banking finance companies ( nbfcs ) and later to housing finance companies as well. the relaxation in the maintenance of the slr was enhanced to the extent of up to 1. 5 per cent of their ndtl. in order to curtail leveraging, commercial banks, all - india term lending and refinancing institutions were not allowed to lend against or buy back cds held by mutual funds. this restriction was relaxed in the context of the drying up of liquidity for cds and cps. considering the systemic importance of the nbfc sector, the government in consultation with the rbi announced the setting up of a special purpose vehicle ( spv ) that could raise funds from the rbi against government - guaranteed bonds to meet the temporary liquidity

years ago. the phasing in of petroleum revenues increases demand for labour in the public sector and in enterprises selling goods and services to households. the contest for labour is reflected in high wage growth and a deterioration in competitiveness in exposed industries. many enterprises in the sheltered sector can, in principle, pass on higher labour costs to customers. monetary policy must reduce the possibility of passing on these costs in order to keep inflation at bay. this is done partly by keeping growth in demand for goods and services under control. in addition, a strong krone may boost imports of goods and services previously reserved for domestic producers. in rural areas and towns, where local government employment is an alternative to working in agriculture, fisheries, local services or small - scale industry, the public sector with its nationwide agreements can be a wage trend - setter. wage growth in the public sector can therefore be an important source of higher inflation. in the public sector, higher labour costs due to costly income settlements can only be passed on to customers to a limited extent. on the other hand, the rise in costs can intensify pressures to increase government allocations. most likely, the central government will be expected to pick up the bill when labour costs rise sharply. in the business sector – with its profitability requirements – higher labour costs must be matched by an increase in productivity. in principle, the central government will apply the same requirements to government agencies. how these requirements will be met in practice will have a decisive impact on developments in central government expenditure and, consequently, on interest rates and the krone exchange rate. real growth in public spending revised national budget 2002 growth in central government expenditure - rise in prices for expenditure 7. 0 % = real spending growth 2. 5 % 4. 4 % distributed as follows : real growth, transfers 2¾ % real growth, investment 6¾ % real growth, consumption 1½ % sg kommunalbanken, 30. august 2002 growth in public spending between 2001 and 2002 is estimated at 7 per cent. this is considerably higher than growth in private sector mainland gdp, which is estimated at around 4 per cent. the fiscal guideline is then closely adhered to. real growth in public consumption is estimated at 1½ per cent. in other words, growth in production of public services will be moderate, even though public spending is rising sharply in nominal krone terms. this is because the cost of producing public services is rising sharply, reflecting high wage growth in the public sector