Liquidity management to become fully neutral gradually: Rajan

The Reserve Bank today announced a slew of measures to overhaul the liquidity management system, including a gradual shift to a neutral stance on money supply against extant practice of managing a supply deficit.
"A major focus of this policy has been to address liquidity issues," Governor Raghuram Rajan told reporters after announcing the first bi-monthly policy of the fiscal.
The measures include both long term as well as short term ones to tackle the current spate of tight liquidity.
"It has been decided to continue to provide liquidity as required, but progressively lower the average ex-ante liquidity deficit in the system from 1 per cent up or below of deposits (NDTL) to a position closer to neutrality," the monetary policy document policy said.

The RBI also announced a reduction in the minimum daily maintenance of CRR from 95 per cent of requirement to 90 per cent effective April 16, and narrowing the policy rate corridor by 0.50 per cent by reducing marginal standing facility by 0.75 per cent, apart from increasing the reverse repo rate by 0.25 per cent that will help release more money.
The policy said the average overnight borrowings by banks have increased to Rs 1,935 billion in March from Rs 1,345 billion in January.

Rajan said two new factors--elevated cash balances of government maintained with RBI and cash accumulation with the public--led to the current liquidity crunch, which had touched an all-time high of Rs 2.6 trillion mid-March.

"On a review of how far we have come with overnight instruments, we decided that it was no longer necessary to maintain the significant liquidity deficit. We could move towards a more neutral position," Rajan said, adding this shift entails removal of deficit by up to Rs 90,000 crore.
The Reserve Bank also announced an OMO or bond buyback of up to Rs 15,000 crore today, the third such instance of infusing money through the instrument in 2016.
Without giving a timeline for the shift to being neutral--he limited himself to saying this will take a few years and is not possible in a few quarters--Rajan said the RBI hopes to keep the call money rates closer to the repo.

"Over the next 12 months, we will examine how much durable liquidity we want to infuse. In other words, how much reserve money creation we want. And then, regardless of short-term liquidity conditions such as government balances etc we will infuse that amount of durable liquidity," the Governor said.
The academic-turned-central banker also had a friendly advice for reporters in the room and what is required of them.
"All of you are getting a very good education in central bank balance-sheets. It is not something that most people understand, but these liquidity measures require you to understand that very keenly," he said.