RBI kept the banking sector liquidity in a neutral zone: India Ratings

05 Jul 2016 Evaluate

India Rating Research has said that banks can no longer complain that policy transmission is getting hampered due to liquidity tightness as the Reserve Bank of India has honoured its promise of keeping the banking sector liquidity in a “neutral” zone, or no-deficit, no-surplus mode that will help consumers to derive faster benefits from the central bank's policy rate cuts.

Ratings agency has noted that the central bank has injected Rs 80,000 crore of long-term liquidity through secondary market bond purchases through its open market operations. The government’s surplus cash balances with RBI has now come down to zero even as there has been reduction in cash in circulation in June 2016. OMO (purchase/sale) is a mechanism through which the central bank infuses or sucks out cash into the system. According to the report citing RBI data, the cash-crunch in the system was as high as 1.4 lakh crore during February-March, fag end of the financial year FY16. In the last week of June, the system was marginally cash surplus in the range of Rs 31,700 crore - Rs 19,700 crore.

As per the rating agency the money market rates have stayed on the softer side with the overnight call money rate hovering close to the lower bound of the liquidity adjustment facility corridor as well as in its April bi-monthly policy RBI decided to progressively lower the average ex-ante liquidity deficit in the system to a position closer to neutrality. However, the rating agency also said that the central bank ensured of smooth supply of durable liquidity over the year using asset purchases and sales as needed, aims to narrow the policy rate gap to +/-50 basis points from 100 earlier. The repo or policy rate at which banks borrow short term funds from RBI is now at 6.50 per cent versus 6 per cent reverse repo, at which RBI borrows from banks.

India Rating further said that foreign currency non-resident (B) deposit redemption and an increase in currency-in-circulation from end-1QFY17 will be a major determinant for the next round of OMO purchases. It added that the improved liquidity will also aid at the time of maturity of foreign currency non-resident (bank) or FCNR (B) deposits, when banking system liquidity is expected to get strained.

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