The Hindu Business Line : ‘CRR cuts unlikely to help improve liquidity’

Bangalore, Oct. 15 The Reserve Bank of India’s (RBI) liquidity support through Cash Reserve Ratio reduction and farm loan waiver payments is likely to have only a short-term effect on the financial markets, top bankers said.

The current infusion, coming by way of the first instalment of the farm waiver compensation of Rs 25,000 crore, would have an effect equivalent to a 50 basis points reduction in the CRR. The 100 basis points CRR cut would bring another Rs 40,000 crore. CRR, the zero interest cash balances banks are expected to maintain with RBI, is currently 7.5 per cent, after the 150 basis points reduction last week.

Below expectations

Bankers said liquidity demand would continue to remain tight in the markets despite the infusion. The infusion was not unexpected, but fell far short of expectations, bankers said. This was evident from the 21 basis points increase in the 91-day Treasury bill yield over the last week.

The cut-off YTM at today’s auctions was 8.69 per cent, as against the previous week’s level of 8.48 per cent. Besides, at the two Liquidity Adjustment Facility auctions, recourse to the repurchase window was a cumulative Rs 55,340 crore. This was despite last weekend’s infusion of Rs 60,000 crore through the CRR reductions.

Bankers said that the tightness was entirely on account of the rupee’s depreciation that has triggered a compression in the reserve money. The compression was led largely by the foreign institutional investor selling.

Since the beginning of the week, FIIs have sold the equivalent of about $1.1 billion. However, the rupee firmed to Rs 48.43 to the dollar from Rs 48.72 last weekend, despite the FII sell-off.

RBI intervention

Bankers said that this appreciation was partly on account of the RBI’s intervention in the markets. The sell-off was mostly through swaps — sell cash and buy back forward. However, this intervention was one of the key factors leading to a compression in the high-powered money.

Credit growth

Besides, bankers said, the Government directive to bankers to sustain all sanctioned credit flows, is likely to further push up credit growth. Once the peak season credit off-take beginsn, bankers said more liquidity infusions would be essential.

Accordingly, bankers said that some buy back options of market stabilisation securities were expected. This was in addition to the proposal to make “Triple A” rated PSU bonds as repoable securities. This would allow banks to use their holdings of PSU bonds as eligible securities for drawing short-term liquidity from the RBI’s window.

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