Despite the Reserve Bank of India's (RBI) decision to cut the Cash Reserve Ratio (CRR) by 25 basis points in the mid-quarter monetary policy review on Tuesday, the street expect Open Market Operations (OMOs) purchase auction of gilts by the RBI in the near term. This is because the cut of 25 basis points may not make a significant impact on the liquidity situation.
CRR is the proportion of total deposits a bank has to keep with RBI as cash. After the cut, the CRR stands at 4.25% of the Net Demand and Time Liabilities (NDTL) effective the fortnight beginning November 3. The 25 basis points cut in CRR will infuse liquidity worth Rs 17,500 crore in the banking system.
“OMO requirement will be there and the RBI may bring in OMOs to pacify the liquidity situation in the market. The LAF borrowing has been hovering about Rs 1 lakh crore and this Rs 17,500 crore will not be sufficient to release a good amount of liquidity,” said Vivek Mhatre, general manager (treasury), Union Bank of India. According to Mhatre we are in the festive season and in this season there is always tightness in liquidity. The festive season will get over and the marriage season will start due to which till the second week of January liquidity tightness will remain in the system.
Under OMO purchase auctions the RBI purchases gilts in the open market in order to enhance the liquidity in the banking system. In the current fiscal the RBI has infused Rs 54,573.277 crore worth liquidity by way of OMOs.
According to J Moses Harding, head – asset liability committee and economic and market research, IndusInd Bank, system liquidity deficit is expected to remain above RBI's tolerance level of 1% of NDTL till end March. There will be need for OMOs if borrowing by banks under daily Liquidity Adjustment Facility (LAF) sustains above Rs 1,00,000 crore.
Borrowing by banks under the daily LAF had crossed the Rs 1,00,000 crore mark a couple of times earlier this month. According to Harihar Krishnamoorthy, treasurer, FirstRand Bank, with the CRR cut the daily average liquidity deficit should amount to around Rs 75,000 crore till some spending by the government is resumed. Banks borrowed Rs 77,475 crore under the daily LAF on Tuesday.
The CRR stood at 6% at the beginning of the calendar year and it was brought down to 4.5% in three trances till September. The cuts in CRR had helped to injected liquidity worth Rs 97,000 crore in the system. According to Harding CRR will be down at 3.5% by the end of the current fiscal.