Banks breathe easy as RBI promises liquidity support

Bankers were relieved at the liquidity easing measures of the Reserve Bank of India, expected to bring down the current cash crunch significantly.

They said the cut in Statutory Liquidity Ratio, the amount of its reserves that each bank must maintain in liquid assets, would release Rs 50,000 crore into the system. RBI will infuse another Rs 48,000 crore though open market operations (OMO).

In its mid-quarter review of monetary policy, RBI reduced banks’ SLR requirement to 24 per cent from 25 per cent. And, said it would purchase bonds through OMO in four tranches of Rs 12,000 crore each, to be conducted every week for the next four weeks.

The first of these bond purchases would be in the week ended December 24, it said.

“The Reserve Bank will have flexibility in the scheme, including the frequency, timing and the amount of OMO as may be necessary, depending on the evolving liquidity and market conditions,” RBI said.

It said the twin measures would release substantial primary liquidity in the banking system and help lower overnight rates (at which one bank lends to another, for next-day return) closer to the repo rate (at which banks borrow from RBI).

“The OMO buy-back is likely to push up base money growth or new money creation by Rs 48,000 crore till the end of January and this should bring the deficit in the system closer to the RBI’s comfort range. This, of course, remains contingent on the success of the buy-backs, which in turn are extremely sensitive to the choice of securities put on auction,” HDFC Bank said in a research note.

The daily liquidity deficit has been around Rs 1 lakh crore. It may come down to Rs 50,000 crore, the RBI’s comfort level, bankers said.

“Both the actions will help us to sell excess securities and generate liquidity. Banks were engaged in fierce competition to mop up deposits by increasing rates. There will also be a pause to that,” said T Y Prabhu, chairman and managing director of Oriental Bank of Commerce.

Investments in government bonds by banks are five-six per cent above the stipulated minimum, as banks hold around 30 per cent of their net demand and time liabilities in government bonds, as against the floor of 25 per cent.

“The extension of the comfort on SLR commitments to a permanent cut by one per cent is likely to push banks who were initially reluctant to liquidate securities amidst the ad–hoc relaxation till January 28, 2011, to now access the facility more actively,” HDFC Bank said.