Action if liquidity tightness persists, says H R Khan

The present liquidity tightness is being caused by festival-related demand for currencies and rise of government balances. However, if it persists, the central bank will take action, said H R Khan, deputy governor of the Reserve Bank of India (RBI). He said he expected the tightness to be short-lived. “It is short term, very short term. It may pass off,” he said.

Banks were borrowing around Rs 1 lakh crore a day last week from the repo window of RBI. The deficit in the system is above RBI’s comfort zone, of plus or minus one per cent of banks’ net demand and time liabilities.

Khan was speaking on the sidelines of Bancon, the annual banking seminar. He added, “If it is slightly longer, we will take action. If it is longish, if the liquidity shortness continues, we will take action.” He declined to comment on whether RBI would conduct open market operations to infuse liquidity.

RBI reduced the cash reserve ratio — the proportion of deposits banks need to park with RBI as cash — by 25 basis points, to 4.25 per cent — in October, in anticipation of tight liquidity conditions. It infused Rs 17,500 crore of primary liquidity into the system.