RBI will take all necessary steps to ease liquidity: Subbarao

The Reserve Bank of India (RBI) on December 8 said that it would take all the necessary steps to ease liquidity constraints in the money market. In order to have smooth liquidity situation, the RBI has been buying back government securities, after having raised its short term lending and borrowing rates 13 times.

‘In order to ease the situation, so far, we have carried out open market operations for Rs 25,000 crore. We would take all necessary steps to see that liquidity is eased. We are aware of the advance tax payment situation. We will take that into account while assessing the liquidity situation,’ RBI Governor, D Subbarao said.

As per the RBI guidance, liquidity situation should remain between plus/minus 1% of net demand and time liabilities (NDTL) in the banking system, which is around Rs 60,000 crore. However, in last few weeks it has gone up beyond this benchmark, which clearly indicates liquidity constraint in the banking system or for central bank.

The RBI in its last monetary policy review has indicated that it may pause in its hawkish policy stance.  ‘Further rate action, whether it would be paused, depends upon any unanticipated development. Certainly, supporting growth remains our objective, Subbarao said.  Under the liquidity adjustment facility (LAF), since November 24, at repo rate of 8.5%, the banks have been drawing an average of Rs 1 lakh crore daily from RBI. ‘Whatever instruments we have, OMO and LAF are there...If anything else is required, we would do that for liquidity management,’ he added.

Meanwhile, the deputy governor Subir Gokarn said that the consideration that goes into a cash reserve ratio (CRR) cut, or CRR action, has to be kept in mind. The consideration fundamentally is CRR is not just a liquidity tool, but also a monetary policy signal. And, we are, as of now, still in a situation in which inflationary pressures are high. By adding further he said, for the moment, while we want to address the liquidity situation, we don’t want to do it in a way that compromises our monetary stance. So, the use of these tactical measures like OMOs is clearly the way we are going to go.

Experts are of the view that the RBI should use CRR, which is the proportion of deposits banks need to set aside with RBI as cash, as a tool to manage current liquidity crisis. Presently, the CRR is 6%. 

However, on the prospect of a cut in CRR in the upcoming policy meet, RBI governor said ‘I cannot really react to what the market is expecting outside the context of the policy. Whatever we might decide, on the CRR or otherwise, you would have to wait for our mid-quarter statement.’

Since March 2010, the RBI has increased its key policy rates for 13 times. However, the RBI is expected to go for another rate hike in its next monetary policy review, which is scheduled on December 16, because of the high inflation, which has been hovering above 9% from last few months.