RBI conducts liquidity operations on Saturday to tackle outflows

Uses MSF route to help banks tide over tight liquidity brought on by tax outflows

The Reserve Bank of India (RBI) decided to offer funds to banks for two days through the marginal standing facility (MSF) on Saturday to ease liquidity for banks as outflows rose on account of tax.

The MSF was conducted today and its reversal will take place on Monday. The MSF being the penal rate is set at 8.75 per cent above the repo rate of 7.75 per cent. In the past banks have asked the RBI to conduct repo auctions every Saturday, but the central bank decided to infuse liquidity through the MSF just for today.

The liquidity tightening was evident from overnight rates inching up over the last couple of days due to the outflow of funds.

In its sixth monetary policy statement released earlier this month the RBI had said the average daily net borrowings under the liquidity adjustment facility, including term repos, reverse repos and the MSF, were around Rs 85,000 crore in December and January.

Similarly, in the December monetary policy review statement the RBI had noted that in view of abundant liquidity, banks’ recourse to the RBI for liquidity through net fixed and variable rate term and overnight repos and the MSF declined from Rs 80,300 crore, on average, in the first quarter of 2014-15 to Rs 70,600 crore in second quarter and further to Rs 47,600 crore in October-November.

“There was some liquidity tightness in the market because of tax outflows. The collection was for tax deducted at source (TDS) and arrears, which has been estimated to suck out Rs 8,000-9,000 crore. Today is the start of a new reporting fortnight and it is possible that a few banks are finding it difficult to manage liquidity,” said the head of treasury of a large state-run bank.

Banks have to adhere to a cash reserve ratio (CRR) requirement of 95 per cent daily and 100 per cent on a fortnightly basis. Earlier, banks were allowed to maintain CRR at 70 per cent on a daily basis. In July 2013, when the rupee-dollar exchange rate turned volatile, the RBI raised this requirement to 99 per cent, among other liquidity-tightening measures to curb speculation in the currency market. After the exchange rate stabilised, these measures were rolled back, but the CRR requirement was retained at 95 per cent.

In the past bankers had asked RBI to bring down the CRR mandate from 95 per cent on Saturdays or conduct repos. “This is because the NEFT (National Electronic Fund Transfers) and RTGS (Real Time Gross Settlement) transactions happen on Saturday but there is no repo facility on that day. Having a low CRR will help us in tackling the issue,” said a senior treasury official of a bank.

However, the RBI argued that banks could use technology effectively to predict inflows and outflows. Banks have been asked to put in place a model to predict their liquidity needs more accurately.