Reserve Bank of India (RBI) deputy governor Subir Gokarn on Monday said liquidity infusion through open market operations (OMOs) could not resolve the deficit problem, adding there was still room for reduction in the cash reserve ratio.
He said the banking system currently held up to 5.5 per cent of excess statutory liquidity ratio (SLR) and a reduction in this would not add to liquidity now. “I think the space that has opened up for the use of the cash reserve ratio was something we exploited in January,” Gokarn said on the sidelines of an event here.
RBI had cut the cash reserve ratio by 50 basis points in the third quarter policy review. This had released Rs 32,000 crore into the banking system. The central bank is slated to announce the mid-quarter policy review on March 15 and owing to the coming corporate advance tax payments outflow, markets expect some liquidity-easing measures from RBI. Gokarn said the central bank was conscious of the impact of outflows on account of advance tax payments.
Gokarn said open market operations (OMOs) had limited capacity to address the liquidity deficit, which was quite large. “The market absorption capacity also has to be taken into account.
“If SLR holdings were close to the limit, a reduction in the SLR would have been useful. Now, there is no practical value to it,” he said, adding skewed excess SLR was not a concern, as banks with surplus liquidity were lending to needy banks through the call money market.
After borrowing Rs 1.7-1.9 lakh crore daily from RBI’s repo window, banks on Monday drew Rs 1.1 lakh crore. Banks are mandated to maintain a minimum 24 per cent of net demand and time liabilities as SLR in the form of government securities. These can be used to borrow funds from RBI under the Liquidity Adjustment Facility (LAF).
Gokarn said despite the tight liquidity conditions, money markets were stable. “If the call rate is 20-25 basis points above the repo rate, which is typically when liquidity conditions are normal, we think the market conditions are orderly and though the liquidity deficit is beyond our comfort zone, there is no instability in the market,” he said.
On Monday, overnight call money rates ranged between 8.4per cent and nine per cent range, after touching 9.15 per cent last week. Banks also accessed the marginal standing facility (MSF) to borrow funds at 9.5 per cent for a few days. Gokarn said, “MSF came into play, and that gave us a comfort that the LAF was behaving in a stable way, even as the cost was rising.”
The RBI deputy governor said the current liquidity tightness was partly temporary, and partly due to structural problems like the central bank’s foreign exchange market intervention. He said OMOs were being conducted to offset the structural issues.
On the policy rate reversal, Gokarn said rising oil prices posed an upward risk to inflation. He added the pricing power of producers may have been hit due to the slowdown in growth. “With growth having somewhat slowed, whether higher input prices can be automatically passed through to consumers by producers is a question.”
