OMO a monetary policy tool, deposit accretion picking up: RBI

"It is more of a monetary policy tool and not a debt management instrument," a senior RBI official told reporters here today.

OMO is not being used to influence bond yields, he said. "OMO is done in a more enduring manner and not to influence the yield curves," the official said.
On the statutory liquidity ratio (SLR) now at 24 per cent, the RBI Deputy Governor Subir Gokarn said the apex bank presently feels that there is no need to tinker with it.

SLR is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The RBI had reduced the ratio from 25 per cent to 24 per cent in December 2010. On January 25 (2011), the RBI, in its efforts to combat the prevailing high inflation, lifted its key short-term rates--repo and reverse repo rates by 0.25 per cent each to 6.5 per cent and 5.5 per cent, respectively.

On RBI's concern over the abnormal incremental credit-deposit ratio, Gokarn said the deposit mobilisation by banks is beginning to catch up. "There is still a wedge though the catching up is going on," he said.

The RBI had in its third-quarter monetary policy review, said that it would constantly monitor credit growth and if necessary, engage with banks which show an abnormal incremental credit-deposit ratio.

The RBI is sending the message to banks that they can't borrow overnight and lend, he said. In a liquidity-deficit situation such as the one prevailing presently, banks have an incentive to raise deposits. "Deposits mobilisation is becoming a motivation (for banks) as liquidity is deficit," he said.

The RBI's learning from its experience of 2010 is that if liquidity is in excess then transmission of rate action becomes weak. "Hence, we have tried to absorb excess liquidity through cash reserve ratio (CRR) hikes (last year)," he said. However, when liquidity turned deficit in May-June last year, transmission became visible with banks raising their rates.

"Liquidity has remained deficit and transmission has been relatively quick," Gokarn said, adding "as long as liquidity is on the deficit side, our rate action is transmitting."