Subir Gokarn, Deputy Governor of the Reserve Bank of India, explains the logic behind some of the steps taken in the quarterly monetary policy review. The RBI maintained status quo on policy rates but cut the SLR by one percentage point to 23 per cent. SLR or statutory liquidity ratio is the proportion of deposits that banks have to maintain in the form of investments in cash, gold or government paper. He said that the RBI had acted in this regard to provide banks some cushion if and when a liquidity crunch emerges in the immediate future.
Excerpts:
Why cut the statutory liquidity ratio?
We were concerned about the liquidity situation for some time. Over the last few years we have made a distinction between monetary stance and liquidity management. In this particular situation, although there is no immediate need for liquidity infusion, because bank borrowings are in our comfort zone, there is a subtle liquidity pressure because of the gap between credit growth rate and deposit growth rate. Over the next few months, that pressure might re-emerge as deposit growth might be slower than credit growth. We thought if we do it now, banks can plan ahead as opposed to waiting for a policy action when the pressure becomes visible. The SLR cut has created capacity, although there is no immediate liquidity infusion.
Banks continued to hold much higher SLR portfolio even when you reduced the ratio earlier. So, will this reduction be effective?
Yes. Apart from the SLR which was at 24 per cent, there is a 2 per cent window for Market Stabilisation Scheme (MSS). We have seen in the past that when liquidity pressure was high, banks being a bit reluctant to approach the MSS window because they thought there was a stigma attached to it. We took pains to clarify that this was not a ‘stigmatised window’. It was only a premium. So in the last episode of liquidity pressure, many banks approached MSS on a daily basis and it fully met their needs. So what we are saying is that you can use the SLR with a greater degree of flexibility. Yes, the system may have excess SLR but many individual banks don’t have it. They will now get some flexibility. Banks keep excess SLR because the returns are good and they don’t want to fall short on liquidity. Therefore, they will now have this cushion.
When there is the possibility of higher government borrowing, isn’t reducing SLR sending a wrong signal?
Well, we manage the government borrowing programme through market placement. We are not driven to ensure that the government borrowing happens at a particular rate. That is not our objective or mandate in terms of debt management. Our basic objective is to ensure liquidity in the financial system remains at comfortable levels, so that in addition to other stresses, this doesn’t become one of them. So whether it is the SLR action or the earlier CRR action or the ongoing OMO actions, these have all been motivated by this objective. Of course, the yield on government securities is a by-product of this, but that is not the target.
You pared down the GDP forecast, but not the credit growth target. Why?
If you take the product of the GDP forecast and the inflation number, the real GDP is still the same. Since credit is a nominal variable, the credit growth number was not subject to change.
You have announced some relaxations on Exchange Earners Foreign Currency account . Why?
If you go back to November 2011, when the rupee was falling, we have taken a number of steps to contain the one-way pressure and contain both the velocity and volatility. These measures have been a bit regressive in the sense that they have reduced the space for participants to operate. Based on the feedback that we have received we have taken a number of steps to make things a little smoother and give a little more flexibility. All these measures should help participants hedge more effectively while not contributing to volatility.