Liquidity deficit at all-time high SLR cut expected

A CRR cut alone may not suffice high oil prices dim expectations of a repo rate cut

Banks borrowed nearly Rs 1.8 lakh crore from the repo window of the Reserve Bank of India (RBI) on Monday, indicating an acute liquidity shortage in the market. This is the most banks have borrowed from the central bank in a single day.

The heavy borrowing by banks was aimed at supporting their loan demand to meet targets for the current financial year. Also, with workers from banks, insurance, mining and transport companies threatening to go on a strike tomorrow, banks have stacked up their liquidity needs. The strike, called by all the 11 central trade unions, is to protest rising prices, contractualisation of work, unemployment and violation of labour laws.

Typically, banks tend to borrow more in the first week of the reporting fortnight to cover the reserve needs for the period. The liquidity tightness can be attributed to the fact that today is the start of a new reporting fortnight. Also, banks would want to be prepared for the withdrawal pressure from companies, ahead of advance tax outflows.

“The liquidity shortage has become a structural issue; hence it is safe to assume RBI would deliver the next round of 50-basis point CRR (cash reserve ratio) cut on 15th March….The infusion of Rs 32,000 crore through a 50-basis point CRR cut may not have a significant impact on short-term money market rates,” said Moses Harding, executive vice-president and head (asset liability committee and economic & market research), IndusInd Bank.

Market participants expect RBI to take proactive steps to ease the liquidity crunch, which is expected to worsen, with corporate advance tax outflow by the middle of March. Apart from a CRR cut, dealers now expect RBI to cut the statutory liquidity ratio (SLR), albeit temporarily, by 100 basis points to 23 per cent.

“Merely a cut in CRR, which will infuse Rs 32,000 crore into the system, will not suffice. RBI needs to look at unconventional steps like a temporary dip in the SLR,” said a dealer with a public sector bank.

SLR is the mandated proportion of government bonds that banks need to hold. Currently, SLR is 24 per cent of a banks’ net demand and time liabilities.

“The liquidity deficit is very high, and today, it was nearly three times the comfort of the central bank. The situation can worsen during advance tax outflows in mid-March. So, some measure from RBI, in terms of a cut in CRR, is expected. This would ease the liquidity deficit,” said Samiran Chakraborty, chief economist and head of research, Standard Chartered Bank.

Though the liquidity situation is tight, the overnight rates remained stable. Interbank call rates closed at nine per cent intraday, compared with 8.75 per cent on Saturday, dealers said.

Though a relief on the liquidity front is expected, hopes for a cut in the interest rates by RBI have dimmed, as international crude prices have gone through the roof. With Brent crude prices hovering at around $125 a barrel, market participants said RBI may defer the rate cut, earlier expected in March. “It will be difficult for RBI to cut rates at a time when oil prices are hovering at around $125 per barrel,” Chakraborty said.

RBI had opted for a pause in rate rises, as the inflation trajectory changed its track. However, with international oil prices flaring up, inflationary pressures would be back, as the country imports more than 80 per cent of its oil requirements.