Policy in accommodative mode: Arundhati Bhattacharya

There is one point of concern. It has been observed since the last monetary policy, system liquidity has turned into a significant deficit mode

The Reserve Bank of India (RBI)'s policy announcement of a status quo was on expected lines.Guided by uncertainty in global markets, it appears RBI may have preferred to continue in an accommodative mode. There is one point of concern, though. It has been observed since the last monetary policy, system liquidity has turned into a significant deficit mode. As of now, the liquidity deficit is averaging around Rs 1.5 lakh crore compared to around Rs 50,000 crore deficit over October-November, possibly driven by factors other than seasonal, like depletion in net foreign exchange assets. RBI, however, has actively intervened through variable term repos to mitigate such liquidity tightness. Another cause of liquidity tightness is the sudden jump in currency demand by the public even after the festive season is over. For example, in FY16, currency with the public has increased by a sharp 27 per cent. This trend needs to be watched closely.

The enhanced liquidity coverage ratio (LCR) norms from January will also necessitate new products on the part of the banks. For example, banks in India provide working capital finance to their customers by means of cash credit (CC) limits. Steps may be thus taken to eventually replace CC with working capital demand loans (WCDL).

In addition, large CC limits that can be drawn by the borrowers without any notice may pose liquidity challenges to the banks.

In addition, undrawn limits are considered as part of possible outflows for LCR, resulting in banks being forced to maintain high quality liquid assets (HQLA) that only means additional 4.5 per cent G-sec holdings.

On the deposit side, banks should be ready to offer non-callable deposits as a product at least to those customers for whom the run-off factor is higher. This will ensure lower bank holdings in HQLA, and hence a larger pie of funds for lending for productive purposes. To summarise, greater autonomy for Indian banks is certainly going to be a one of the major change agents in the coming days.

Arundhati Bhattacharya
Chairman, State Bank of India