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Banks facing liquidity deficit are hoping that the Reserve Bank of India will conduct open market operations (OMO) to help them tide over the crunch.
That some of the smaller banks are facing liquidity tightness due to slowdown in deposit growth is underscored by the fact that out of the nine working days this month so far their borrowing from the RBI was around Rs 1 lakh crore or more on four occasions.
CRR vs OMO
With banks investing more than Rs 40,000 crore every month in Government bonds, liquidity tightness has further increased, sparking a clamour for a CRR cut in the cash reserve ratio or more OMOs.
The RBI conducts OMOs periodically to either infuse funds (by buying back Government securities held by banks) or suck out excess liquidity (by selling to banks Government securities that are in its portfolio).
Bankers expect the central bank to announce a CRR cut in the third-quarter monetary-policy review to be announced on January 29. The CRR or the portion of deposits that banks have to park with the RBI now stands at 4.25 per cent.
While CRR is a more permanent measure which carries with it the risk of boosting inflation, OMO is considered a more targeted measure, as it injects liquidity when really needed, according to bankers.
“We expect OMOs to the extent of Rs 15,000 to 20,000 crore by the first half of fourth quarter,” said K. Eswar, General Manager, Treasury, Central Bank of India.
“Deposit growth has been slowing due to investments in equities, gold and mutual fund SIPs,” Eswar said.
Contrarian view
There is also a view that there is no real liquidity crunch, because the statutory liquidity ratio (SLR) of banks is more than required. SLR requires banks to have 23 per cent of their deposits in eligible Government securities.
As Moses Harding, Head, Economic and Market Research of IndusInd Bank, points out, banks’ SLR has increased by about 6-7 percentage points over the existing 23 per cent.
“Banks are buying bonds ahead of the CRR cut, which is expected in the monetary policy. As long as the excess SLR is being funded, the OMOs could take place to that extent. However, there is no major liquidity concern. So, I do not expect much OMOs to take place,” Harding said.
The RBI has been announcing OMOs every week, but there are gilts auction also every week, because of which the impact is getting nullified.
RBI Deputy Governor H.R. Khan had recently said, “I think it (liquidity deficit) is more than Rs 1 lakh crore...we will see if it persists, as we have told earlier, we will do OMOs, like we have done in the past.”
The RBI has conducted five OMOs since December and infused Rs 46,902.15 crore to ease liquidity pressure. In the last OMO conducted on January 4, the RBI infused Rs 7,845 crore into the system.
According to the treasury head of a public sector bank, “It is an interest-rate call. Banks are taking huge positions in fixed-income securities. We have seen huge volumes, but yields are not going up despite heavy sell-off, as it is cushioned by equal purchases.”
The other options that RBI has include increasing the current export refinancing eligibility limit. In June last year, the RBI had decided to enhance the export credit refinance limit to 50 per cent of the outstanding rupee export credit for banks from 15 per cent, a move aimed to inject liquidity to the extent of Rs 30,000 crore into the system.
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