Reserve Bank likely to focus on liquidity management

Tight situation since earlier policy appraisal, with high and volatile short-term rates; however, some observers also feel it might choose not to ease things now, with credit demand yet to pick up

Due to volatility in overnight rates, the Reserve Bank of India (RBI)’s focus could be on liquidity management in its third bi-monthly monetary policy review, to be detailed on Tuesday.

In the previous review, too, RBI had taken steps towards liquidity management. RBI had earlier said it wanted call rates to hug the repo rate (at which it lends to banks), which is at eight per cent. Of late, rates have even hovered near nine per cent.

Moses Harding, group chief executive officer (liability and treasury management) & chief economist at Srei Infrastructure Finance, said: “The agenda this time is on the liquidity and cost of liquidity. RBI has administered tight liquidity and elevated short-term rates, which is obviously not growth-supportive. There is need to loosen the tight grip to supplement the government's growth pick-up measures.”

Harding believes RBI has a choice between a cut in policy rates or to raise the amount of refinance from the overnight repo counter from the current 0.25 per cent of net demand and time liabilities (NDTL). In July, RBI has infused about Rs 170,000 crore by way of term repos; even so, overnight rates continue to be volatile. Banks have not been tapping the Marginal Standing Facility of RBI much and there have also been days when they did not borrow anything through that window.

Experts have identified reasons for the tight liquidity and a few believe it might continue. “We have got good inflows on the FII front in both debt and equity. RBI has been buying these dollars to prevent the rupee from appreciating. When RBI buys dollars, it adds rupee liquidity in the system. To neutralise this, RBI has been doing forward swaps,” Badrish Kulhalli, head of fixed income at HDFC Life, said. The government might also have slowed its spending compared with April and May, adding to liquidity tightness, he added. “In April and May, government spending was quite large due to payments of past dues for subsidies. Now, the government might keep tight control on spending. It might also be reassessing most of the programmes they are spending on.”

In the June policy review, RBI had reduced the Statutory Liquidity Ratio for banks by 50 bps to 22.5 per cent. However, it had also reduced the liquidity provided under the export credit refinance facility to 32 per cent from the earlier 50 per cent. To compensate, RBI had introduced a special term repo facility of 0.25 per cent of NDTL.

It had said it would continue to provide liquidity under seven-day and 14-day term repos of up to 0.75 per cent of NDTL.

Some believe RBI might not take further liquidity-easing steps, since credit demand is not strong. “If liquidity is eased further, that money will be used only for speculation and making gains out of arbitrage,” said Rupa Rege Nitsure, chief economist, Bank of Baroda. She feels RBI does not want banks to depend on it too much for their daily cash management.