The Reserve Bank of India’s (RBI’s) decision to cut the cash reserve ratio (CRR) by 25 basis points (bp) in the mid-quarter monetary policy review on Monday may result in lowering the possibilities of further open market operations (OMOs) purchase auction of gilts by RBI in the near term.
CRR is the proportion of total deposits a bank has to park with RBI in cash. After the cut, the CRR is 4.5 per cent of the net demand and time liabilities, effective the fortnight beginning September 22.
The 25-bp cut in CRR will infuse liquidity worth Rs 17,000 crore in the banking system. “The CRR cut lowers the possibility that RBI would resume OMOs (open market operations) immediately. The lack of RBI demand for gilts in the near term is a short-term negative for gilts,” said Anubhuti Sahay and Nagaraj Kulkarni of Standard Chartered Bank. They, however, believe OMOs remain likely in the medium term and that should be supportive of gilts.
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Dhananjay Sinha, economist & strategist, Emkay Global Financial Services, concurred.
“In the short term, it would imply lower possibilities of OMOs. RBI has provided for Rs 17,000 crore of liquidity and that is in anticipation of liquidity tightening that may happen. So, to that extent, OMOs may not happen,” he said.
Under OMO purchase auctions, RBI purchases gilts in the open market to enhance liquidity in the banking system. In this financial year, it has infused Rs 54,573 crore worth of liquidity by way of OMOs.
Anjali Verma, economist at MF Global India, believes in the current financial year, RBI might conduct further OMO purchases worth Rs 70,000 crore. Before on Monday’s CRR cut, her expectation was OMO purchases worth Rs 80,000 crore.
However, a few economists believe the CRR cut is too meagre for lowering the possibilities of further OMOs in the near term.
“RBI will have to supplement this CRR reduction with OMOs because the rabi crop is expected to be much better this year, due to which agricultural loans will pick up in the second half,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
She also said the second half of 2012-13 is the busy season for companies; over and above that, if foreign direct investment comes in, some projects might take off.
These factors would result in credit demand picking up in the second half. Combined with the usual seasonality of advance tax outflows and high demand for currency in the festival season, it is going to create pressure on liquidity, said Nitsure.
According to Shubhada Rao, chief economist, YES Bank, with this CRR cut, the end-September liquidity deficit position is expected to improve towards Rs 40,000-50,000 crore from the Rs 60,000-70,000 crore expected earlier. Despite this improvement, liquidity pressures are likely to build up gradually from November and would still require around Rs 80,000-90,000 crore, primarily liquidity infusion. While a large part of this is expected to come in the form of OMOs, some CRR support in the form of a further 25-50 bp cut cannot be ruled out, said Rao in her report on Monday.
