CRR not preferred tool to manage liquidity: RBI

CRR not preferred tool to manage liquidity: RBI

New Delhi: The Reserve Bank of India (RBI) expressed discomfort about using the cash reserve ratio (CRR) as a tool for managing liquidity, contrary to market calls, saying it would send mixed signals.

“CRR we are seeing as a monetary instrument. We don’t want to give a signal that we are changing our monetary stance...we are using instruments that will give us short-term control over liquidity without in any way compromising on the monetary stance," RBI deputy governor Subir Gokarn told reporters on Wednesday.

The RBI on Monday extended the ongoing measures to provide liquidity comfort to banks, arising out of the “frictional liquidity pressure."

It also relaxed the statutory liquidity ratio (SLR) by 2% compared with earlier relaxation of 1%, enabling banks to borrow more from the repo auctions.

SLR is the amount of government bonds and other approved securities that banks have to invest as a percentage of their deposits. It has been cut to 23% from 25% temporarily.

But traders said the moves were inadequate and a reduction in CRR, the level of deposits that banks must hold with the central bank in cash, was needed.

“Even if they cut CRR by 50 basis points, that will infuse Rs25,000 crore liquidity. This will keep liquidity in deficit mode, will be consistent with inflation stance and yet it will bring liquidity deficit to lower levels," said Vivek Rajpal, a fixed income strategist at Nomura.

The benchmark 10-year bond yield rose to a 1-month high of 8.12% on Wednesday mainly on tight cash concerns and up 16 basis points from 3-week low touched last Friday.

“CRR clearly remains an option but we, at this point, maintain that our monetary stance is still anti-inflationary... and we don’t want to send any mixed signals about a change in monetary stance," Gokarn said.

Banks have been borrowing on an average about Rs1 lakh crore ($22 billion) daily from the central bank’s twin repo auctions since November, indicating the extent of cash tightness.

The spread between the 1 month and 1 year swaps narrowed to 10 basis points from 23 basis points at the start of November.

“Obviously we can’t use SLR endlessly. So if there are further pressures developing, obviously these other options in terms of buybacks or OMOs (open market operations) from the RBI side are clearly on the table," he added.

The central bank next meets to decide policy on 16 December, but can change rates and ratios at any time. Most analysts expect the bank to keep rates steady, after having hiked the key policy rate six times by a total of 150 basis points this year.