Standard Chartered India today called for more sustained steps by the Reserve Bank to increase money supply to the system, as it feels the prevailing tight liquidity situation will continue till the end of the fiscal even if the government spends all of its surplus cash.
"Reduction in government borrowing to ease liquidity will offer only a temporary respite at the best and a more sustained solution may require expanding the scope of RBI action like more open market operations," the bank said in a report on liquidity released here today.
Report authored by StanChart India regional head of research Samiran Chakraborty and its senior rates strategist Nagaraj Kulkarni further says the expected liquidity shortfall following the mid-December advance tax outflow may be a bit higher than our earlier projection of Rs 1.4 lakh crore by the month-end.
Though many hold that if government spends all of its surplus cash by the end of this fiscal, liquidity will improve dramatically, StanChart does not think so as it feels that such a spending will not be enough to cover the deficit.
"If at all the government spends the entire planned Rs 12.6 lakh crore during the fiscal, implying spending around Rs 5 lakh crore between December and March, that would still leave an estimated liquidity deficit of about Rs 50,000 crore," Chakraborty said.
Therefore, "without further liquidity easing measures by RBI, even if the government spends all of its surplus cash, banking liquidity will remain in deficit at the end of March," the report concludes.
"According to our analysis, the government spending alone cannot bridge the liquidity deficit on a sustained basis. Therefore, further direct intervention by RBI in the form of expanding open-market operations may be needed. A cut in the cash reserve ratio is an option RBI could probably take only under exceptional conditions," said Kulkarni.
Though liquidity started drying up too fast since early October, following the Rs 17,500-crore Coal India public issue, it has been on a downhill drive for quite some time on the back of the sustained liquidity-crunching measures by RBI to batten down inflation.
In response to the liquidity squeeze, the government cut its auction size on Monday for the first time this fiscal, and the Reserve Bank has continued its efforts to ease the pain by using a wide range of tools, including opening a second LAF (liquidity adjustment facility) for banks to borrow twice a day. Yesterday, banks have snapped up over Rs 1.3 lakh crore through.
According to the RBI a liquidity deficit of around Rs 50,000 crore is healthy as this shows that the monetary transmission measures are effective.
Another reason for this tight situation arises from the fact that government spending has not kept pace with the high revenue growth in the first half, causing the cash surplus to rise to unusually high levels in the last few months to an estimated Rs 96,500 crore at the end of November, says the report.