Market sees liquidity easing measures from RBI in monetary policy review

Overnight rates stay firm despite repo rate cut last month

Bankers expect the Reserve Bank of India (RBI) to announce liquidity-easing measures in the next bi-monthly monetary policy review on February 3, even as overnight rates continue to stay firm despite policy rate cut by RBI on January 15.

The key policy rate, or the repo rate, is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds.

Liquidity has stayed tight, with the government cutting expenditure in a bid to meet the fiscal-deficit target for 2014-15, pegged at 4.1 per cent of gross domestic product (GDP). Liquidity condition typically worsens in March owing to corporate advance tax outflows.

According to market participants, RBI might enhance the term repo window available for banks to infuse liquidity in money markets. In the April 2014 monetary policy review, RBI had increased the liquidity provided under seven-day and 14-day term repos from 0.5 per cent of net demand and time liabilities (NDTL) of the banking system to 0.75 per cent.

“RBI might provide liquidity in the system to take care of productive needs of the economy. The central bank might enhance the term repo window to meet the requirement of productive credit. The enhancement can happen to probably 1.25 per cent of banks’ NDTL for different maturities. This will also help in the development of the term curve,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

Despite a repo rate cut of 25 basis points to 7.75 per cent, call money rates remained around eight per cent and banks have been availing all the windows for liquidity – overnight repo, term repo and marginal standing facility.

“There are chances that the term repo window might be enhanced to one per cent. The enhancement of 0.25 per cent will result in additional liquidity worth Rs 20,000 crore. This kind of enhancement will help tackle the liquidity squeeze. This will give a positive signal to the market in terms of liquidity,” said the head of treasury at a large state-run bank.

The term repo window was introduced for banks in October 2013 and in August 2014, the central bank had decided to conduct more frequent term repos to keep overnight rates close to the repo rate and entice banks to do more efficient liquidity management.

According to estimates, the advance tax payment sucks out liquidity worth Rs 60,000 crore from the system. “After the advance tax outflow, there might be some liquidity crunch. Also, in the fourth quarter, there is some seasonal pick-up in credit demand. So in advance, RBI might be creating liquidity,” said Rupa Rege Nitsure, chief economist and general manager at Bank of Baroda.