Surplus liquidity may not persist beyond FY27: RBI Governor Malhotra

Sanjay Malhotra says currency leakage and OMOs will absorb funds; calls CRR hike among least preferred tools for RBI

Surplus liquidity in the banking system is expected to drain within the current financial year, Reserve Bank of India (RBI) Governor Sanjay Malhotra said during the post monetary policy press conference on Wednesday.

 

He said currency leakage, sell-buy swaps, open market operations (OMOs) and variable rate operations would absorb the excess funds.

 

“We do not expect the surplus liquidity to last for a very long time. So, within this financial year itself, I expect a large amount of this liquidity without giving a number — the currency leakage that happens, the sell-buy swaps that we have already done and are doing, and other tools like OMO and variable rate repo (VRR) that we are using. The spot intervention that we do to support the rupee — all these things, I do not expect, without giving you any numbers, such high surplus liquidity to remain for a very long period of time,” said Malhotra.

  

The governor further said that a cash reserve ratio (CRR) hike remains among the central bank’s least preferred tools to drain surplus liquidity, though the central bank has not ruled out the option.

 

Responding to a question on whether costlier foreign exchange swaps should make way for a CRR increase, Malhotra said he did not want to rule out anything in an evolving and uncertain scenario.

 

“I do not want to rule out anything because it is still an evolving and uncertain world and it is something which will be one of our least preferred modes of taking out liquidity,” he said.

 

The immediate challenge for the central bank after the rate hike remains to keep the weighted average call rate (WACR) aligned with the repo rate while excess liquidity remains elevated.

 

Core liquidity surplus is around ₹10 trillion, a large part of which is in the form of government cash surplus, and could continue to keep overnight rates below the repo rate.

 

“RBI should continue focusing on liquidity management through conventional tools of OMOs/VRRs instead of resorting to CRR. CRR as an instrument of active liquidity management is expensive to administer and using reserve requirements to fine-tune the money supply is like trying to use a jackhammer to cut a diamond,” State Bank of India said in its report.

 

The WACR was at 5.36 per cent on Wednesday against the previous close of 5.12 per cent. Net liquidity in the banking system was in a surplus of ₹4.98 trillion on Tuesday, latest data from the RBI showed.

 

“The absence of a CRR hike and OMO sale suggests that the RBI is comfortable continuing with variable rate reverse repos (VRRRs), buy-sell swaps and ongoing sterilisation,” said V R C Reddy, head of treasury at Karur Vysya Bank.

 

Banks parked ₹ 2.55 trillion against the notified amount of ₹3 trillion at the overnight VRRR auction. The RBI received the amount at a weighted average rate of 5.49 per cent.

 

“He (the governor) mentioned that CRR hikes, though on the table, were much lower in the pecking order. This suggests that the RBI is not in a hurry to use blunt tools to quickly drain liquidity,” HSBC said in a report.