RBI played balancing act in mid-quarter review: Banker

Reacting to Reserve Bank of India's (RBI)'s mid-quarter review of the monetary policy Tuesday, Indian Overseas Bank (IOB) chairman and managing director M. Narendra said: "Immediate focus will be on managing liquidity conditions with a view to preparing the ground for further shift in policy to support growth in the next review."

Expecting RBI to come out with more open market operations to keep the liquidity comfortable in view of the continuing lag in deposit growth, he said: "The government's bold declaration not to exceed the original borrowing target of Rs.5.7 lakh crore for the current fiscal has been a great comfort for the banks."

Narendra said the interest rates on short term deposits and other money market instruments may be under temporary pressure but the overall rates are likely to stay at the current levels.

Stressing that there was never a compelling case of cash reserve ratio (CRR) cut, HDFC bank's chief economist Abheek Barua said: "While the liquidity deficit in the system has widened from an average of Rs.60,000-70,000 crore in October to Rs.95,000-100,000 crore between November and December, much of this is on account of a seasonal pick up in credit growth and the credit-deposit ratio as well as an accumulation of government cash balances with the RBI."

He said in the past the central bank has communicated its preference in using open market operation buybacks to offset temporary pressures on liquidity rather than opting for a more permanent CRR cut, even though it may not have followed it as a strict rule of thumb before.

Besides, the CRR is currently at its lowest level since 1976 and the RBI may have wanted to save further cuts for later, possibly in Q4 period if a sharper than anticipated fiscal slippage drives the government to step up market borrowing at the time.

"The markets were expecting at least a CRR cut so to that extent the policy was a bit of a disappointment. But the tone of the RBI has increasingly shifted towards supporting growth rather than focusing purely on inflation management," said Vaibhav Agrawal, vice president research banking at stock broking firm Angel Broking.

He said the policy has also reinforced its guidance on easing in the fourth quarter, so that should appease markets to an extent.

"Going ahead, softening commodity prices along with a high base are likely to lend a positive bias on bringing down headline inflation. Overall, the broader point is that interest rates look to have peaked and with the possibility of FY (financial year) 2014 GDP (gross domestic product) growth being better than FY 2013 as well as healthy global liquidity, the outlook for markets remains decent," he added.