Demand to cut CRR increases, as liquidity remains in shortage

As the system faces liquidity shortage and inflation came down to below seven per cent in January, pressure has mounted on RBI to cut the cash reserve ratio further.

"Inflation is coming down, (but) one has to watch oil prices. The priority is to look at the liquidity situation. RBI is ably managing the situation. I expect some CRR cut to take place," ICICI MD Chanda Kochar told reporters here.

According to an YES Bank analysis, the average money market liquidity deficit has consistently remained above RBI's level of comfort since November, 2011.

The Economics Knowledge Banking Wing of YES Bank said in a statement,"We expect the RBI to start addressing the stress in money market liquidity through a combination of a 50 basis point cut in the CRR and one or two rounds of open market operations."

RBI is slated to announce its monetary review on March 15. The analysis said the deficit in liquidity has persisted despite policy response in the form of RBI's open market operations and CRR cut. RBI had cut CRR in its last monetary review by 50 basis points.

The analysis further said currency leakage continues to be an important structural drag on systemic liquidity.

"Rupee weakness and the RBI's forex intervention in response have accentuated the pressure on systemic liquidity," it added.

The research further said significant upward movement in crude oil prices could potentially act as an important source of risk for systemic liquidity. Crisil, on the other hand, wanted inflation to be tackled through fiscal consolidation with a focus on increasing investment spending, productivity improvements in bottleneck areas and reducing shocks from sudden changes in prices of petroleum products by aligning them to global prices. After remaining over nine per cent for a year till November, 2011 wholesale price index-based inflation has been showing signs of moderation.

It came down to 6.55 per cent in January. Banks have been borrowing over Rs 1 lakh crore from overnight repo auctions of the RBI because of the tight liquidity conditions. Also, advance payments for the last quarter of this fiscal by March 15 are expected to put an additional burden on the system in terms of liquidity shortage.