Barring a few days, banks have borrowed around `1 lakh crore from the Reserve Bank of India (RBI) on a daily basis since January to meet their liquidity requirements. The figure may inflate in the last week of March due to year-end pressures.
But bankers do not expect RBI to reduce the cash reserve ratio in the mid-quarter monetary policy review on Tuesday.
“The current liquidity tightness is due to lack of government spending and year-end rush for funds,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.
He said it will be a ‘close call’ and the RBI may not even reduce repo rate if it is concerned about effective monetary policy transmission not happening due to tight liquidity. “The RBI may opt to wait till May and cut repo rate when liquidity will be much easier,” said Prasanna.
The central bank had cut repo rate and cash reserve ratio by 25 basis points (bps) in January in response to lower inflation print. The policy action had come after a long wait of nine months.
“Even when RBI cut both repo and cash reserve ratio, our cost of funds did not come off. Instead, it increased due to lower deposit growth,” said a senior executive of a public sector bank. He said banks won’t be able to pass on the benefits of rate cut.
Liquidity conditions may improve from April when government starts spending and when credit pick-up is seasonally lower as compared to the rest of the financial year. In May, the central bank will announce the annual monetary and credit policy for 2013-14.
A treasury official with a public sector bank said there could be pressure from advance tax outflows. For this, the RBI may conduct open market operations (OMOs) next week and in the first week of April.
Another measure would be opening special liquidity adjustment facility window on March 28 and 30, keeping in mind two public holidays that week.
“While liquidity-enhancing measures such as OMOs are possible given the current tight liquidity situation in the banking system, a reduction in the cash reserve ratio looks difficult to us unless the RBI considers this liquidity deficit to be structural in nature,” noted Anubhuti Sahay and Nagaraj Kulkarni, economists at Standard Chartered Bank.
A policy-rate cut is expected because of lower core inflation, sluggish growth and government’s commitment to contain fiscal deficit. More importantly, the RBI may not want to miss the opportunity to cut rates when all these factors are in favour.