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Reserve Bank of India (RBI) Governor D Subbarao on Thursday said the central bank would be undertaking open market operations (OMOs) or other measures to manage liquidity.
“OMO is part of liquidity management. As and when necessary, we will do OMOs or other liquidity management measures,” Subbarao told reporters after the RBI board meeting here. Last week, Union Finance Minister P Chidambaram had said RBI had indicated “a rather liberal” OMO policy. The expectation of more gilt purchases by RBI has started building up since the minister’s comments. RBI had, last week, announced OMOs of four dated securities of Rs 10,000 crore.
Subbarao said RBI would actively manage liquidity to ensure the deficit stays within the one per cent corridor of net demand and time liabilities (NDTL). “On liquidity, the standard answer which we have given several times is that we will manage liquidity to ensure it is within plus/minus one per cent NDTL, subject to, of course, the frictional constraint that we face,” he said.
Banks have been borrowing Rs 63,100 crore daily, on an average, from RBI’s repo window since April 1. Since May 1, the daily average repo borrowing by banks has been Rs 93,000 crore. “There are uncertainties about liquidity in the system and we will try to manage that actively,” he said.
On whether RBI would retire foreign exchange forward sale contracts to manage liquidity, Subbarao replied in the negative. “We don’t use forex intervention as a measure of managing liquidity. Liquidity gets affected as a result of forex intervention,” he said.
Asked whether RBI would next cut the repo rate or banks’ cash reserve ratio further, Subbarao said one would have to wait till the next policy review. After a spate of rate increases, RBI has reduced the repo rate by a cumulative 125 basis points since April 2012. “You will have to wait till our next review. I cannot speculate or give a view on policy stance in a press conference,” he said.
On introduction of Islamic banking in India, Subbarao said a new law would have to be legislated, as the existing one does not allow banks to lend or borrow without changing any interest. Islamic banking is the system of banking that works according to the Shariah (Islamic jurisprudence), which prohibits transactions involving interest. Islamic banking works on the principles of sharing of profit and loss.
On Cobrapost’s series of sting operations alleging that most of the banks are aiding money laundering, Subbarao said appropriate action would be taken against institutions found to be flouting norms. Cobrapost’s stings have alleged that prominent banks and insurance companies, including State Bank of India, Life Insurance Corporation of India, ICICI Bank, Axis Bank, and HDFC Bank, were helping customers launder money through investments in insurance products.
