 "Lack of govt spending hits liquidity")
According to bankers, more bond purchases by open market operations are expected from the Reserve Bank of India. However, the present liquidity problem is seen as a temporary issue rather than a structural issue.
Yesterday, RBI governor D Subbarao had said that the central bank is open to use the cash reserve ratio tool too, for easing liquidity.
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The central bank uses the CRR to address structural liquidity problem. In the annual review of monetary policy, RBI kep the CRR unchanged at 4%, while reduced the repo rate by 25 bps to 7.25%.
Liquidity deficit in the system is expected to remain around Rs 1 lakh crore, till government starts spending, which is above RBI's comfort level of +/- 1% of Net Demand and Time Liabilities (NDTL). Dealers said the central bank should conduct more Open Market Operations (OMO) purchase of government securities to ensure that the deficit does not touch Rs 1.5 lakh crore.
Banks borrowed Rs 1,01,440 crore on Tuesday under LAF auction compared with the liquidity deficit of Rs 97,615 crore on Monday. This is the seventh time in this fiscal when the deficit has crossed Rs 1 lakh crore.
“The liquidity deficit of Rs 1 lakh crore is now considered normal. RBI should ensure that it does not touch Rs 1.5 lakh crore,” said a treasury official with a private bank.
According to the officials there has been outflows on account of pending tax besides the service tax outflows in May. It is estimated to be about Rs 15,000-20,000 crore. RBI is auctioning government securities worth Rs 15,000 crore every week which is also impacting liquidity, the official added.
To comfort the liquidity deficit RBI had announced that it would conduct an OMO of up to Rs 10,000 crore on Tuesday. But despite that it will not help to bring down the system liquidity deficit. RBI bought government securities worth Rs 9,658 crore in the OMO.
“The government cash balances with RBI is as high as Rs 90,000-1 lakh crore. That should flow back to the system to comfort the liquidity deficit,” said a treasury official of a public sector bank. The street expects RBI to conduct more OMOs this month else the liquidity deficit will climb up to Rs 1.5 lakh crore.
The liquidity deficit which currently exist is frictional. “The deficit is frictional. If government starts spending and banks start unwinding their excess Statutory Liquidity Ratio (SLR) funded by deposits or absorbed by OMOs, the liquidity situation will improve,” said J Moses Harding, head - ALCO and economic and market research, IndusInd Bank.
RBI governor D Subbarao said in a post-monetary policy conference call to analysts and researchers on Monday that the auctioning of government's cash balances is in the discussion stage between the government and RBI. However, Subbarao points out that by auctioning this there will not be a change in the overall liquidity situation.
“Banks instead of borrowing from the LAF window, will be getting these securities through some other window. Overall it will not change the liquidity situation, it will change the costs to the government. We will come to a decision when we conclude our discussions with the government,” said Subbarao.