RBI bends backwards with 'de facto' SLR cut

When it comes to liquidity, the Reserve Bank of India (RBI) seems to be preferring to err on the side of caution.

Late on Wednesday, it raised the limit on borrowings by banks under its repurchase or repo facility by 0.5% of their total deposits to offset heavy fund outflows expected due to payments for 3G spectrum by auction winners and advance tax.

The RBI said it will also conduct a second repo auction daily till July 2.

Crucially, the central bank said, for any shortfall in maintenance of SLR arising out of availment of this facility, banks may seek waiver of penal interest.

That would tantamount to a temporary reduction in SLR of 50 basis points.

Yields should soar Thursday.

Mint Road, however, clarified these are ad hoc measures to address temporary tightness in liquidity.

The moot point is, was this needed at all?

Systemic statutory liquidity ratio currently stands at 28% or in excess by at least 300 basis points or about Rs 135,000 crore (3% of the banking sector deposit base of Rs 45 lakh crore).   

This could have easily be drawn down by banks.
Moreover, banks have parked a sizeable, if not similar, amount with mutual funds and a few thousand crores more with the RBI itself.

Yes, apart from 3G and advance tax, there is about Rs 50,000 crores of government borrowings next month. But then, in July there will be about Rs 50,000 crores of bond redemptions, which will come into the system; and the advance tax and 3G payment outflows will also return through government spending.

“If market can’t live paying 5.25% interest on LAF credit for a month, as it seems to have persuaded the RBI to think, it’s not a very good situation. The market’s being immature,” said an irritated bond market trader, who did not wish to be named because he wasn’t authorised to speak.

“A central bank should not be pandering to such feigned withdrawal symptoms,” he said.

How much does the 0.5% increase in the repo limit mean? An injection of an additional Rs 22,500 crore, if utilised.
When there were huge liquidity issues during the global turmoil of the past, the money market had managed well without going off-kilter.

“Also, it’s always good to slowly reduce liquidity and remove froth in these times,” the expert said.