RBI steps to ensure enough liquidity, say bankers

CRR cut likely to be considered, says finance ministry official.

Terming yesterday’s move by the Reserve Bank of India (RBI) to further ease liquidity in the banking system a just recognition of the shortage, bankers say the move will provide succour in the coming weeks.

RBI yesterday announced additional support under the Liquidity Adjustment Facility (LAF) up to two per cent of net demand and time liabilities (NDTL) to banks and extended the second LAF window. Both facilities would be available till January 28, it said.

Borrowing by banks from the central bank, which crossed Rs 1.5 lakh crore on November 23, was more modest at a net Rs 85,480 crore at the two LAF auctions today.

RBI could also consider asking banks to maintain a lower cash reserve requirement (CRR) if the shortage persists despite the measures, Bloomberg News reported, citing a finance ministry official who spoke to reporters in New Delhi on condition of anonymity. CRR, or the cash banks must keep with the RBI, is six per cent of their deposits. “It is clear that there is shortage of cash, and several more public sector share sales are coming up, as also the advance income tax payments in mid-December,” said a banker with a foreign bank. “But it is also a tough task for RBI, which has to ensure its prime objective of inflation control doesn’t get diluted, while ensuring government borrowing also passes off without a hitch.”

Companies pay an instalment of advance income tax on or by December 15. It often results in large amounts of cash going out of the system for some days. The scarcity of cash is pushing banks to increase deposit rates, say bankers.

On November 9, the central bank had re-introduced the liquidity comforting measures in view of the tight situation. Banks were allowed a support of one per cent of their NDTL and a second LAF. Both were to be available till December 16.

“These measures (of November 9) were intended to provide liquidity comfort arising out of frictional liquidity pressures reflected in the LAF window of the Reserve Bank. The liquidity pressure has, however, continued,” RBI said today.

With inflation moderating and concerns on prices abating, there is less pressure on the central bank to raise interest rates, though a robust Gross Domestic Product number today for the July-September quarter at 8.9 per cent did raise some concern that the central bank could have rate increase on its prime agenda in January.

“For any shortfall in Statutory Liquidity Ratio maintenance up to January 28, 2011, arising out of availment of this facility, banks may seek waiver of penal interest on a fortnightly basis, purely as a temporary measure. The liquidity support availed under this facility would, however, need to be reported on a daily basis,” RBI said.

Banks need to keep at least 25 per cent of their demand and time liabilities in the form of government bond investment.

The liquidity injected by the Reserve Bank through its LAF window since November 8 has averaged over Rs 1,00,000 crore daily.

Head of treasury with large public sector bank said the one per cent extra relaxation in Statutory Liquidity ratio can release Rs 50,000 to Rs 60,000 crore in the system. This is relevant step which RBI had to take. The monetary authority has done its best.

Now, confidence building measures are necessary from government. Unless government spending improves, how one can expect the situation to improve?. Government is maintaining balances in excess of Rs 36,000 crore with RBI, official added.