Liquidity likely to improve in Q1: RBI

Says higher govt spending will supplement the easing of tight liquidity condition

The Reserve Bank of India (RBI) today said liquidity condition is likely to improve in the current quarter as a response to the recent cuts in cash reserve ratio (CRR) along with open market operations (OMOs).

"The secondary impact of durable liquidity injections by way of CRR cuts and OMOs is expected to considerably ease liquidity conditions in Q1 of FY13," the apex bank said on the eve of the annual monetary policy here.

While RBI has slashed CRR by 1.25% since January, releasing Rs 78,000 crore into the system, it has conducted over Rs 1.3 lakh crore worth of OMOs in the recent months to tide over a tight liquidity condition.

 

The central bank, in its Macroeconomic and Monetary Development Report, also said higher government spending will supplement the easing of a tight liquidity condition.

"Going forward, liquidity conditions are likely to return towards acceptable deficits as a result of an anticipated government spending in the near-term."

Borrowing by banks from the liquid adjustment facility corridor has fallen to Rs 70,000-90,000 crore during last week from a high of around Rs 1.9 lakh crore in March.

The current level is just a little above RBI's comfort level of 1% plus or minus of net demand and time liabilities of Rs 60,000 crore. For the past one year or so it has never been in the positive territory, though.

The report observed that both deposit and credit growth have decelerated in the last financial year.

On the credit front, the central bank said risk aversion attitude of banks, along with lower demand for credit, has resulted in lower growth in advances.

Similarly, factors like dominance of base effect along with tight liquidity situation had pulled down deposit growth in the fourth quarter of the past financial year, the report said.