RBI steps fail to have an impact for now, low govt spending blamed for tightness.
Most bond traders are demanding a strong dose from Reserve Bank of India (RBI) Governor Dr D Subbarao to alleviate the liquidity crunch.
To ease the crunch, RBI on Monday again offered a low-potent remedy in the form of an extended run of twin repo auctions and a higher leeway of two per cent of banks’ deposits on maintenance of the statutory liquidity ratio (SLR) for the next two months.
However, the measure has failed to bring the zing back into the markets.
The overnight rates have hovered at 6.5-6.6 per cent, still above the repo rate of 6.25 per cent. The 10-year bond yield stayed above eight per cent, shrugging off RBI’s latest dosage of liquidity.
The talk of a cut in the cash reserve ratio (CRR) has swirled in the money markets for some time now, and the bout of liquidity tightness is showing no signs of easing and has only become worse.
Liquidity in the banking system has been tight since June and the mega public issues in the last few months has have accentuated the pressure. But, the main trigger for the sustained tightness has been restrained government spending.
The intensity of the cash tightness is reflected in banks’ daily borrowings from the central bank’s repo auctions.
Between October 15 and November 4, banks borrowed about Rs 82,600 crore every day from the central bank, which increased to Rs 1.12 lakh crore between November 8-30.
Expectations that RBI could lower banks’ CRR have strengthened on view that inflation may fall sharply in the coming months.
A possible decline in inflation will make it easier for RBI to explain any liquidity-infusion step whilst monetary policy is perched atop a tightening cycle, some believe.
The head of the Prime Minster’s Economic Advisory Council, C Rangarajan, echoed this view on Tuesday, saying RBI might cut CRR if liquidity tightness prolonged, since inflation was likely to ease to 5.5 to six per cent by March.
A government source said on Monday the headline inflation in November was likely to be around seven per cent, down sharply from 8.58 per cent in September. The data will be officially released on December 14.
Time and again RBI has said it wants the liquidity deficit to be around one per cent of the net demand and time liabilities of banks, or about Rs 50,000 crore. But, the system has been in a much bigger deficit.
Those rooting for a CRR cut argue the move will be a direct injection of funds into the banking system and will help narrow the yawning liquidity deficit.
Some say what RBI has offered in terms of a leeway on SLR is only “potential liquidity” and not something which was in the hands of banks.
Bankers say there is some inertia in dipping below the mandatory SLR holding of 25 per cent of the net demand and time liabilities even though RBI has allowed banks to do so.
A CRR cut is more direct and better, they say.
Potent yet mild dose
If not a direct cut in CRR, one suggestion is that RBI should consider a leeway on CRR maintenance as an ad-hoc measure, just like the flexibility offered on SLR maintenance.
Since a leeway in CRR will be a strictly temporary affair, it is felt the central bank need not fear its impact on inflation expectations.
Although the central bank has ruled out intervention in the foreign exchange market to control liquidity conditions, some bond traders say it will help if RBI resorts to buying dollars.
RBI has tried to expand its balance sheet through open market purchases of bonds. But the move has been passive, as the central bank only bought around Rs 8,000 crore of paper, complained some traders.
They say RBI should buy treasury bills as part of its open market operations, as there could be more offers for short-term papers from the market.
A much easier way out, however, is for RBI to persuade the government to defer or slash its market borrowing till the time cash conditions are tight.
Bond traders are sweating at the prospects of liquidity tightening further next month, when companies will pay around Rs 55,000-60,000 crore as advance corporate taxes.
