Having taken a slew of steps to ease the liquidity deficit, Reserve Bank of India (RBI) Governor D Subbarao on Tuesday said there was a limit to what the central bank could do to infuse funds into the system.
“Over the last few months, we have done several things to ease liquidity. There is a limit to how much RBI can do. Both structural and frictional factors have to unwind. The frictional ones will unwind as the government starts spending the additional cash balance. However, banks have to resolve the structural factors,” said Subbarao.
In its policy review on Tuesday, RBI extended the additional support to banks under the liquidity adjustment facility (LAF) up to one per cent of their net demand and time liabilities (NDTL) till April 8. This was earlier available till January 28. A second LAF will be conducted daily till April 8.
Banks have been borrowing Rs 80,000 crore to Rs 1 lakh crore from the two repo windows.
“Some of the liquidity issues might get resolved as the government gets to spend more and as the banking system gets more money with deposit rates being raised. If it doesn’t, it gives them more time, as they could always act between now and then,” said SBI Chairman O P Bhatt.
To mitigate the liquidity situation, RBI had reduced the statutory liquidity ratio from 25 per cent of NDTL to 24 per cent with effect from December 18.