RBI announces open market operations, but liquidity may remain tight

Further cash reserve ratio reduction is seen in the January monetary policy review

Following the outflow of advance tax from the system, borrowing by banks under the Reserve Bank of India’s (RBI) daily liquidity adjustment facility (LAF) rose to the highest level this financial year on Tuesday, to Rs 1,51,770 crore compared with a daily average borrowing of over Rs 1,00,000 crore in the last one month. This level is far above the RBI’s comfort zone of +/- 1 per cent of banks’ Net Demand and Time Liabilities (NDTL).

“Normally, tax outflows go out of the system three days after December 15. Today, the tax outflow money would have gone out of the system due to which borrowings rose,” said J Moses Harding, head, ALCO, and economic and market research, IndusInd Bank.

 

According to estimates, the advance tax outflows had drained Rs 50,000-60,000 crore of liquidity from the system.

RBI maintained status quo on key policy rates as well as the cash reserve ratio (CRR) on Tuesday in its mid-quarter monetary policy review. CRR is the proportion of total deposits a bank has to keep with RBI as cash, and, it stands at 4.25 per cent of banks’ NDTL. At the start of 2012, it was six per cent and it was brought down to current level in four tranches.

RBI did not cut CRR on Tuesday, as liquidity tightness was due to slow government spending, RBI Deputy Governor Subir Gokarn said in Mumbai.

RBI conducted two open market purchase of gilts this month to make the liquidity situation comfortable.

The central bank infused Rs 23,246 crore by way of open market operations (OMOs) in December. There are expectations of more OMOs. According to Anoop Verma, vice-president, Development Credit Bank, RBI should infuse liquidity by way of open market purchase of gilts and there should be government spending.

The hopes were granted as RBI announced OMOs worth Rs 8,000 crore on Friday. The announcement came after market hours.

Gokarn said in Mumbai on Tuesday the central bank would buy bonds through open market operations, if needed. According to market estimates, OMOs up to Rs 50,000 crore is in store for the rest of the financial year.

However, according to S Srinivasaraghavan, executive vice-president and head, treasury, of Dhanlaxmi Bank, the announcement of OMO will just help improve market sentiments a tad. This is because on Friday RBI will also auction gilts worth Rs 12,000 crore.

Hopes of a further CRR cut is also expected. HDFC Bank Chief Economist Abheek Barua said, “The possibility of a 25 basis point CRR cut in the fourth quarter of FY13 still remains, especially if the government surprises with additional market borrowings.” According to him, OMO buybacks could, however, remain the preferred liquidity easing tool for now, extending the recent softening in gilt yields further.

The 10-year benchmark gilt 8.15 per cent 2022 closed at 8.15 per cent on Tuesday compared with the previous close of 8.14 per cent. “Since there was no cut in CRR, the yield rose marginally,” said Srinivasaraghavan. For the next one week he expects the yield on the 10-year benchmark gilt to trade in the range of 8.12-8.17 per cent.