The Hindu Business Line : Tight liquidity stays RBI hand

Chennai, June 23 For a little over a week, both the debt and equity markets have been in a state of suspense about an impending hike in rates as a consequence of double-digit inflation. There has been an expectation of a repo rate hike and a CRR hike by the Reserve Bank of India.

The RBI has stayed its hand so far — only making some neutral references to the problem without committing to any course of action.

If you are puzzled by the apparent inaction, perhaps a look at the liquidity situation over the past 20 days may throw some light.

There was plenty of liquidity floating in the system in the first week of June — a fact revealed by the amount absorbed by the RBI through its reverse repo auctions.

In this form, the RBI absorbs excess liquidity, by borrowing from banks for a day against its holdings of government paper.

The borrowings are repaid a day later at a cost of 6 per cent per annum.

But since June 10, there has been a slight tightness in the money markets and this is revealed by the fact that banks have been borrowing from the RBI (i.e. RBI has been infusing liquidity through repo auctions at 8 per cent) (See table).

Given this situation, it would appear a hike in CRR may not happen immediately.

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