RBI open to another CRR cut, says Gokarn

Market expects action before March 15 policy meet to tide over liquidity crunch

As a liquidity crunch continues in the banking system, the Reserve Bank of India (RBI) has said it will consider infusing liquidity by further reducing the cash reserve ratio (CRR) to help banks tide over the deficit. Though the central bank is sticking to its stance of acting only during policy meets, market participants want it to reduce CRR before the policy review scheduled for March 15.

“That (open market operations) remains an option as we go along. To the extent an opportunity is available for further CRR cuts, we will also consider that,” RBI Deputy Governor Subir Gokarn said on Tuesday while stressing a CRR cut was not in conflict with the monetary stance.

Last month, RBI had cut CRR 50 basis points to 5.5 per cent to infuse liquidity, while keeping key policy rates unchanged. CRR is the proportion of deposits banks set aside with the central bank. Gokarn, however, reiterated his earlier stand that CRR moves should be undertaken only at the central bank’s policy reviews.

A CRR cut between policy meetings is not ruled out by economists in the present context as liquidity will tighten during the middle of March due to corporate advance tax outflows.

"Given the persisting liquidity pressure, another 50-basis point cut in the CRR in the March policy, accompanied by OMOs (open market operations) till then, looks like a strong possibility. While the RBI clearly prefers to announce such moves on days of scheduled policy announcements, speculation of pre-policy CRR cuts will be difficult to eliminate in the absence of any improvement in the liquidity scenario in the coming days," said Siddhartha Sanyal, chief economist, Barclays Capital.

Asked if liquidity would get tighter with advance tax payments coming up in mid-March, Gokarn said these payouts were fairly predictable and there was a fair amount of clarity on when the funds would come back into the system.

Interestingly, a few members of the technical advisory committee on monetary policy had suggested before the January policy announcement that monetary action could be taken between policies.

According to a Nomura report, advance tax outflow, expected to be in the tune of Rs 60,000 crore, will take the deficit above Rs 2 lakh crore post the advance tax outflow.

“Even a CRR cut of 50 bps during the 15 March policy meeting would not be effective until 23 March (the beginning of the new fortnight; reserves are maintained on a fortnightly basis) and would still result in stress within the banking system between 15 and 23 March,” Nomura said. A 50-bp cut in CRR will infuse Rs 32,000 in the system.

Despite a CRR reduction in January, banks’ borrowing from the repo window of RBI — an indication of liquidity stress in the system — was much higher than RBI's comfort zone. Banks borrowed an average of Rs 1.67 lakh crore daily through repo auctions last week. The central bank's comfort level is one per cent of net demand and time liabilities, around Rs 60,000 crore. Today, banks have borrowed Rs 1.3 lakh crore from RBI.

Gokarn said while open market operations remained an option to infuse liquidity, the central bank was not keen on committing to a calendar as its actions were guided by changing market conditions.

“From our view point, our communication then is that OMOs remain on the table as and when necessary. But, we didn't want to lock it in to a specific set of actions every week because the situation is quite dynamic,” he said.

Since the start of the financial year in April, RBI has injected over Rs 90,000 crore through open market purchases of government securities. However, the room for further bond purchases seems limited, as the government's borrowing programme for the year is nearing its end. After the central bank slashed banks' CRR at the end of last month, it has conducted bond purchase auctions only in alternate weeks.

Though inflationary pressures have moderated in the last couple of months and the fall in core inflation validated the view that interest rates have peaked, the recent rise in oil prices has become a matter of concern.

"...A new risk factor has emerged in the form of higher oil prices. We have to see how persistent that is, how long that particular pressure lasts," he said.