Liquidity woes continue to haunt bankers, as overnight borrowings from the Reserve Bank of India (RBI) hover close to Rs 1 lakh crore for more than a week. Bankers expect RBI to address the issue by cutting the cash reserve ratio (CRR) by 50 basis points in the mid-quarter policy review on December 16. However, the absence of strong signs of moderation in inflation raises doubts on whether such a step would be taken. Currently, the CRR is six per cent.
Since November 24, banks have been drawing an average of Rs 1 lakh crore daily from RBI, at a repo rate of 8.5 per cent under the liquidity adjustment facility. This is well above the central bank’s comfort zone of one per cent of net demand and time liabilities, which works out to Rs 50,000-60,000 crore.
RBI has bought government bonds worth about Rs 15,000 crore through open market operations (OMOs) in two consecutive weeks, and has announced another round for this week as well. “There are rumours of a CRR cut, but that would depend on the acuteness of the liquidity shortage. As of now, it is less acute than in the third week of November,” said Joydeep Sen, senior vice-president (advisory desk - fixed income), BNP Paribas Wealth Management.
December 15 is the deadline for advance tax payments, for which an outflow of around Rs 50,000 crore is expected. This would lead to liquidity shortage of around Rs 1.5-1.8 lakh crore, thrice as high as RBI's comfort level.
“We expect a 50-basis point CRR cut, while policy rates would be left unchanged,” said Moses Harding, head (global markets group), IndusInd Bank. He said the additional pressure on liquidity could trigger borrowings from the marginal standing facility window at 9.5 per cent, pushing the call money rates to double digits. “RBI should address this risk factor before it gets too late,” he said.
However, RBI feels tools like the CRR and the statutory liquidity ratio blur the divide between liquidity and monetary management. RBI Deputy Governor Subir Gokarn had, last week, said the central bank did not plan such moves. He said Indian banks held government securities over the mandated 24 per cent, and these could be used to avail of additional liquidity of Rs 2.74 lakh crore.
A cut in CRR would mean a shift in RBI's policy stance — from tackling inflation to boosting liquidity. A Prasanna, chief economist at ICICI Securities Primary Dealership, said he did not expect a CRR cut this month. “If inflation cools to below eight per cent in December and if liquidity continues to remain tight, RBI may opt for a 50-basis point cut in CRR, while keeping the policy rate unchanged in the third quarter policy review,” he said. The third quarter policy review is scheduled for January 24.
“RBI treats OMOs as a liquidity management tool, and the CRR as a monetary tool. It may first wait for inflation to fall, before using CRR as a tool to infuse liquidity,” said Vivek Rajpal, India rates strategist, Nomura.
