Despite the cut approved in banks’ Cash Reserve Ratio (CRR) by the Reserve Bank of India (RBI) in today’s third-quarter review of monetary policy, liquidity is expected to remain tight. So, some feel, RBI might make another cut in CRR, in the next mid-quarter review, on March 19.
CRR is the proportion of total deposits a bank has to keep with RBI as cash. Today, this was cut by 25 basis points (bps), to four per cent of banks’ net demand and time liabilities, effective the fortnight beginning February 9. Since January 2012, CRR has been cut by 200 bps, in five stages.
“The cut will release Rs 18,000 crore liquidity. Not much, given that bank borrowing under RBI’s Liquidity Adjustment Facility (LAF) is around Rs 1 lakh crore (daily). The borrowing under LAF might come down to about Rs 85,000 crore after this CRR cut comes into effect,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.
He expects another cut in CRR on March 19. Today, banks borrowed Rs 91,305 crore under the LAF, compared with an average of about Rs 98,000 crore.
Yesterday, banks had borrowed Rs 110,165 crore. The marginal drop in borrowing resulted in overnight call money rates easing a bit. In the inter-bank money market, call rates ended at 8.07 per cent today; they did so at 8.09 per cent yesterday.
After the CRR cut takes effect, call rates are expected to drop below eight per cent. According to J Moses Harding, head of the asset-liability committee and of the economic and market research at IndusInd Bank, the overnight call money rate will now settle at 7.80-7.85 per cent but the impact on the three-month to 12-month tenor rate curve will not be significant, given the upward pressure on deposit rates into the financial year end in March.
RBI has also been conducting buying gilts in open market operations (OMOs). Harding says in the near term, RBI might consider OMOs only when the 10-year benchmark bond yield hardens into 7.9-8 per cent, on pipeline bond auctions.
Yield on the 10-year benchmark bond ended at 7.85 per cent today, compared with the previous close of 7.87 per cent.
