 "the core team: (From left) RBI Deputy Governors S S Mundra, Urjit Patel, H R Khan and R Gandhi with Governor Raghuram Rajan (centre), during the central bank's first bi-monthly monetary policy of FY17, in Mumbai")
The Reserve Bank of India (RBI) has shifted its stance on liquidity in the banking system, from keeping it in a certain amount of deficit (about one per cent of net demand and time deposit liabilities) to one of keeping it close to zero (or ‘neutrality’).
This is expected to help banks reduce lending rates in the days ahead. The central bank also mentioned it had hitherto underestimated the amount of excess cash in the system at a time when many states are going for elections. Explaining the change, Governor Raghuram Rajan said in the backdrop of the various measures taken to fix the policy rate close to the repo rate, through overnight instruments, the need to maintain the system in liquidity deficit is no longer there.
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Banks had often complained that tight liquidity often came in the way of revising their lending rates. The steps taken to improve liquidity will now give them room to pass on rate cuts, noted Rajan.
Moving from a one per cent deficit to about neutral means an additional Rs 80,000 to 90,000 crore. RBI has to see how much the system can take, he added.
Some of the steps outlined to erase liquidity pressure were reduction in the minimum daily maintenance of the cash reserve ratio (CRR), from 95 per cent of the requirement to 90 per cent.
RBI also decided to narrow the policy rate corridor from plus or minus 100 basis points (bps) to 50 bps. So, the marginal standing facility (MSF) rate would be seven per cent and the reverse repo would be six per cent. Previously, the MSF rate was 100 bps above repo and the reverse repo was 100 bps lower than the repo.
Madan Sabnavis, chief economist, CARE Ratings, said lowering of the policy corridor would be especially useful when banks are borrowing in the market. By lowering the MSF rate, call rates would tend to move down. And, banks with surplus funds can earn more through the reverse repo window.
The liquidity issue with banks caused by lower growth in deposits has been addressed partly by lowering the minimum daily balances to be held under CRR. Banks will gain to the extent of Rs 20,000-21,000 crore on this count. However, this is lower than the impact of a CRR reduction of, say, 0.5 per cent; this would have released around Rs 50,000 crore, said Sabnavis.
On excess cash in the system, the governor said the bank was trying to understand it. Around election time, cash with the public increases, not only in those going for polls but in neighbouring ones, too. At present, this is Rs 50,000-60,000 crore more than what RBI had anticipated, he said.
The central bank’s report said liquidity conditions, tighter since mid-December, were stretched further by the larger than usual accumulation of cash balances by the government. The unusually heightened and persistent demand for currency, a pick-up in bank credit and flatter deposit mobilisation at this time, relative to past years, also contributed to the pressure.
RBI said it had tried to quell these pressures and supplemented normal operations with large amounts of liquidity injected through fine-tuning of variable rate repo auctions. in tenors ranging between overnight and 56 days. The average daily liquidity injection (including variable rate overnight and term repos) increased from Rs 1.34 lakh crore in January to Rs 1.93 lakh crore in March.
Durable liquidity was also provided through open market operations of the order of Rs 51,400 crore and Rs 37,500 crore through buy-back operations in February and March.
It had also started conducting reverse repo and MSF operations on holidays in Mumbai, to enable frictionless functioning of the payment and settlement system.
