The Reserve Bank of India (RBI) on Tuesday said banks could borrow up to two per cent of net demand and time liabilities from marginal standing facility as against one per cent earlier, to provide greater liquidity cushion to lenders.
Marginal standing facility (MSF) is an additional borrowing window under which banks can avail of funds from RBI at a penal rate of 100 basis points above the repo rate. With the reduction of 50 basis points in the key policy rate announced in the Annual Monetary and Credit Policy, the MSF rate also stands adjusted to nine per cent from 9.5 per cent earlier.
“The increase in MSF limit will provide additional liquidity comfort,” said RBI in the policy statement. “However, should the situation change, appropriate and proactive steps will be taken with the objective of restoring comfort zone conditions.”
Liquidity conditions remained in deficit mode throughout 2011-12. The average net injection of liquidity under the Liquidity Adjustment Facility (LAF) increased from around Rs 50,000 crore during April-September 2011 to around Rs 1.4 lakh crore during February 2012 and to around Rs 1.6 lakh crore in March 2012.
RBI said that tight liquidity conditions were partly because of the central bank’s foreign exchange interventions and partly because of a build-up in government cash balances.
Apart from conducting open market operations (OMOs), RBI had cut banks’ cash reserve ratio by 50 basis points in January and by 75 basis points in March 2012, releasing Rs 80,000 crore into the banking system. The OMOs conducted between November 2011 and March 2012 infused about Rs 1.3 lakh crore of liquidity in the system.
As a result, liquidity deficit fell to Rs 70,000 crore in April after the financial year-end pressures faded.
Higher government borrowing is expected to exert pressure on liquidity. “As the government borrowing programme gains momentum, liquidity could come back under pressure and warrant further RBI accommodation,” said Abheek Barua, chief economist, HDFC Bank.
The government has pegged Rs 5.69 lakh crore of gross market borrowing this financial year, against Rs 5.1 lakh crore raised in the previous year. Of this, the government aims to raise Rs 3.7 lakh crore in the first six months. The government had raised Rs 2.5 lakh crore in the corresponding period of last financial year.
Referring to bank's concerns on supporting high government borrowing, RBI Governor D Subbarao said “Bankers have requested the central bank to manage liquidity conditions actively.”
RBI deputy governor added the current liquidity tightness was not a permanent situation and the overnight call money rates may come down going ahead. The overnight call money rate closed at 8.5 per cent after opening at 8.9 per cent levels on Tuesday. Gokarn said that the central bank's comfort zone is 25bps above or below the repo rate.
Norms for liquidity risk management by May-end
The Reserve Bank of India (RBI) will issue final norms for liquidity risk management and liquidity standards under Basel-III by the end of next month.
The central bank has already issued draft norms for public discussion. These include enhanced guidance on measurement, monitoring and reporting of liquidity positions to RBI.
The draft norms also cover two minimum global regulatory standards — liquidity coverage ratio (LCR) and net stable funding ratio — set out in the Basel-III rules.
The enhanced liquidity risks management measures will come into effect immediately after RBI finalises these. LCR will be binding from January 2015 and stable funding ratio from January 2018.