RBI may infuse another Rs 1.6 trn through OMOs in March quarter: BofAML

BofAML said it does not rule out the possibility of the RBI cutting the cash reserve ratio (CRR) by 1%

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The Reserve Bank of India (RBI) may have to conduct open market operations (OMOs) of another Rs 1.6 trillion in the fourth quarter of the current financial year to tide over the banking liquidity crisis, Bank of America Merrill Lynch (BofAML) said in a report Wednesday.

The global investment firm also said the apex bank's decision Tuesday to infuse Rs 400 billion through OMOs in December may not be adequate to defuse the current liquidity shortfall, which is as high as Rs 1 trillion.

"Our liquidity model estimates suggest that the RBI will need to OMO another Rs 1.6 trillion or $22 billion in the March quarter. This supports our call that the government securities market will slip to excess demand by March," the report said.

The money market deficit is already running at a high Rs 1 trillion, and after advance tax outflows, it could climb to Rs 1.4 trillion in December, it added.

BofAML said it does not rule out the possibility of the RBI cutting the cash reserve ratio (CRR) by 1 per cent if foreign portfolio investors (FPI) flows remain weak.

"This will release about Rs 1.2 trillion into the system and bring the money market to neutral for now. This would then reduce down RBI OMO to Rs 400 billion for the March quarter," the report said.

CRR, which is the minimum amount of deposit that the commercial banks have to keep as reserves with the RBI, currently stands at 4 per cent.

The investment bank said dilution of prompt corrective action (PCA) norms, if finally done, will restore credit flow to even credit-worthy small and medium-sized enterprises (SMEs) only if there is sufficient liquidity via RBI OMO or CRR cut.

Out of 21 state-owned banks, 11 lenders are under the RBI's PCA framework, which restricts their lending and expansion activities.

The report said an RBI special window against bank lending to mutual funds, non-banking finance companies and housing finance companies may not be of any help.

"After all, mutual funds are not facing panicky redemptions but reportedly cutting back investment in NBFC paper," it added.