Forex market interventions not part of liquidity mgmt: RBI

Rajan says it is an opportunistic tool that sometimes comes into play

The Reserve Bank of India (RBI) on Wednesday said the central banks didn’t manage liquidity through intervention in the foreign exchange market.

In the recent past, market participants had blamed RBI for tight liquidity, saying the central bank’s move to mop up dollar flows through forward swaps had tightened liquidity.

In a post-monetary policy conference call with analysts and researchers, RBI Governor Raghuram Rajan said, “I don’t think we manage liquidity through the foreign exchange market. Sometimes, there might be situations in which we can temporarily take advantage of any intervention we have undertaken to alter liquidity positions — take delivery or postpone delivery, given the liquidity situation. But it is not a long-term tool or a tool we rely on.”

In July, the liquidity situation had tightened, owing to which overnight rates had breached the nine per cent mark. RBI wants call money rates to be close to the repo rate, which stands at eight per cent.

Rajan said, “The broader, longer-term programme of five years is we should reduce the amount of preemptions we have in the system, including statutory liquidity ratio (SLR) and make a more effective priority sector lending process.” He pointed to the Nachiket Mor committee on priority sector lending, saying RBI was trying to make the entire process more effective. “These are necessary changes in the system and should not be seen as tied to monetary cycles.”

Rajan conceded the 0.5 per cent cut in SLR wouldn’t have any real impact in the immediate future, adding banks would continue having excess SLR during that period.

In its third bi-monthly monetary policy review on Tuesday, RBI had cut SLR by 50 basis points to 22 per cent. The cut in the SLR holding requirement, which could release an additional Rs 40,000 crore into the system, offered banks the flexibility to manage their finances better when credit demand picked up, said Rajan.

“We will investigate the conditions in the credit and bond markets and make appropriate decisions at that point,” Rajan said, adding banks would continue to be present in the government securities market.