Bankers are hoping that Reserve Bank of India will tilt more towards the market stabilisation scheme (MSS) to mop up extra liquidity that banks are faced with following the November 8 demonetisation announcement.

Some bankers also feel that in the monetary policy review announcement on Wednesday, RBI Governor Urjit Patel will extend for another fortnight the validity of its recent measure asking banks to temporarily maintain an incremental cash reserve ratio (CRR) of 100 per cent.

The upcoming monetary policy review will be the first following the demonetisation of ₹500 and ₹1,000 notes.

In the past two days, at least ₹80,000 crore has been mopped up through the MSS window, whose ceiling was raised a few days ago to ₹6 lakh crore from ₹30,000 crore, banking industry sources said.

Between MSS and CRR, bankers clearly prefer the MSS route as it would yield revenues for the banks.

A section of bankers also feels that the incremental 100 per cent CRR measure — which is scheduled to lapse on December 9 — may be extended for an additional fortnight as part of overall liquidity management exercise.

MSS bonds, which are not issued to meet government expenditure, are securities that enable a central bank to intervene in the market to manage liquidity.

It is widely believed that Indian banking system has received ₹8-10 lakh crore as deposits since the November 8 demonetisation announcement.

CRR is the portion of the deposits that banks are required to park with the RBI. The CRR is currently pegged at 4 per cent.

Market eyes repo rate cut

Meanwhile, the market has factored in a repo rate cut of at least 25 basis points (or one quarter of 1 per cent) on Wednesday.

While the excess liquidity in the banking system will almost certainly give the RBI the elbow room to go in for a rate cut, the monetary policy committee will weigh the impact of higher global oil prices on domestic inflation before deciding on the extent of a cut.

With several economists contending that the demonetisation move will hurt economic growth in the third and fourth quarters of this fiscal, the RBI will also be required to take a call (on the quantum of rate cut) that would support the growth of the economy.

All in all, it will be a delicate balancing act for the central bank, given the new challenges thrown up by the demonetisation, say banking industry insiders.

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