RBI may cut CRR by 1% in Dec if FPI flows don't revive, says BofAML

The report said there will still be a deficit of Rs 1 trn in the system till Dec even if RBI continues to inject money through buyback of govt bonds

Bank of America Merrill Lynch (BofAML) Monday said the RBI is likely to reduce the cash reserve ratio (CRR), or the amount of bank deposits parked with the central bank, by one percentage point in December, if the portfolio flows do not revive. 

Such a move will release $15 billion of liquidity into the system, which is undergoing through a liquidity deficit at present, the foreign brokerage said in its report. 

"...we expect the RBI to cut CRR by 1 per cent, releasing over $15 billion, if FPI (foreign portfolio investment) flows do not revive by December with CPI inflation set to average below 4 per cent till then," it said. 

The CRR stands at 4 per cent at present and the banks do not earn any interest on it.
 

The report said there will still be a deficit of Rs 1 trillion in the system till December, even if RBI continues to inject money through the buyback of government bonds called as open market operations. 

The brokerage said its liquidity model suggests the RBI will have to do $30 billion or Rs 2 trillion between December and March, over and above the Rs 400 billion in November and Rs 360 billion in October announced or done earlier. 

"At the root of the stress in credit markets is tight liquidity that can only be alleviated by RBI OMO/CRR cut, in our view," it said.
 

Commenting on the special window for mutual funds facing redemption pressures, it said that the facility will not be of much help.

Even if the demand for diluting the prompt corrective action (PCA) framework is acceded to, credit worthy small businesses can get loans only if there is sufficient liquidity in the system which will require an OMO or a CRR cut, it said.