Liquidity shortage, which has been above Rs 1 lakh crore for more than a week, fell marginally on Tuesday, as banks borrowed Rs 97,545 crore from the two liquidity adjustment facility windows of the Reserve Bank of India (RBI).
As the tightness continues, market participants are looking for more relief from RBI on the cash reserve ratio (CRR) front.
Though RBI last week re-introduced measures to ease liquidity by providing banks more room on the statutory liquidity ratio front and opening a second liquidity adjustment facility window, banks continued to borrow heavily from RBI. These measures are till December 16.
Therefore, some relief, albeit as an ad hoc measure, like a CRR cut, was required till normalcy returned, market players said.
“RBI could consider reducing CRR temporarily till the deficit in systemic liquidity returns to the comfort zone. This measure, apart from being quick to implement, will have a direct impact on liquidity with banks and, in turn, the money markets,” Namrata Padhye of IDBI Gilts said in a report. A one per cent relaxation in CRR will lead to a direct infusion of Rs 48,000 crore on a temporary basis.
“Continued tight liquidity in the banking system could see RBI cutting CRR as liquidity is expected to tighten further in December due to the third instalment of corporate advance tax outflows,” said C VR Rajendran, general manager (treasury), Corporation Bank.
“We need action on CRR,” said Prasanna Patankar, senior vice president at STCI Primary Dealer. “What is needed is a direct intravenous dose of liquidity to be injected into the banking system and only CRR can do this.”
The central bank said while liquidity in deficit mode was in line with its stance to tackle inflation, large deficit could disrupt the market .
“Even though liquidity deficit is consistent with an anti-inflation stance, excessive deficit can be disruptive, both to the financial market and the credit growth in the banking system. To ensure economic activity is not disrupted by liquidity constraints, the deficit needs to be contained within a reasonable limit,” RBI had said in the second quarter review of monetary policy. However, some believe a leeway in CRR would send wrong signals as inflation was still very high.
“Reduction in CRR, even for a short period, will send wrong signals (reversal of monetary policy stance). Inflation is coming down but is still high, so a cut in CRR is unwarranted,” said a senior treasury official with an associate banking entity of the State Bank of India.
Dealers said the other options before the central bank include discussion with the government on postponing bond auctions, which could impact liquidity more directly and improve the market sentiment. The measure is also not expected to hamper the government’s cash management to a great extent as it has a considerable cash balance with RBI.
RBI is looking at existing measures including relaxing Statutory Liquidity Reserves for banks, open market operations and rescheduling government buy back of bonds to tackle liquidity situation without sending conflicting signals of tackling inflation, RBI deputy governor Subir Gokarn said last week.
