RBI may go for another CRR cut to ease liquidity pressure

The Reserve Bank on Tuesday indicated that it could go in for another cut in the Cash Reserve Ratio (CRR) to unlock banking funds in view of persistent pressure on the liquidity situation.

"We are watching the liquidity situation... I think that decision (another CRR cut) will be taken when we do our mid-quarter review... Having done one, I think the possibility of another is always on the table," RBI Deputy Governor Subir Gokarn told reporters on the sidelines of a NHB function.

In order to ease the liquidity problem in the system, the RBI in its quarterly policy review earlier this month lowered the cash reserve ratio -- the portion of deposits that banks are required keep with the central bank -- to 5.5 per cent from 6 per cent, thereby infusing Rs 32,000 crore into the system.

The Reserve Bank is scheduled to conduct its next mid-quarterly review of the monetary policy on March 15.

Pointing out that liquidity pressures are still there, Gokarn said the central bank would undertake Open Market Operations (OMOs) to pump more funds into the system. The new CRR came into effect from January 28.

"Yesterday was the first day of the new CRR. Call rates are around 9 or 9.1 (per cent)... These are indications of pressures (on liquidity). Based on that, obviously, we will consider OMOs," he said.

As part of OMOs, the RBI buys government securities from banks, thereby injecting funds into the system. When asked if the RBI would prefer OMOs over a CRR cut, Gokarn said the last policy has already given a signal of liquidity easing as interest rates have already peaked.

"When we did CRR cut, we did it recognising that it would be seen as a signal on the monetary stance as well and the signal essentially is that the interest rate cycle has peaked," Gokarn added.

Gokarn said the Reserve Bank's benchmark range for inflation is 4-4.5 per cent and future rate actions would depend on the inflation trajectory. After remaining close to double digits for about a year, headline inflation fell to 7.48 per cent in December, 2011.

The RBI has hiked rates 13 times since March, 2010, to control inflation, thereby squeezing out liquidity from the system. Although this has tightened liquidity conditions, it has also eased inflationary pressures.

He said the RBI would look at the inflation trajectory and the fiscal deficit numbers for next fiscal (2012-13) while deciding on future rate action.

"The (fiscal deficit) number of FY'13 is going to be an important factor in the overall context of what is happening to growth and inflation," he added. The fiscal deficit, which is the gap between overall revenue and expenditure, is budgeted at 4.6 per cent of the GDP for the current fiscal. But by December, the deficit had already crossed 92 per cent of the Budget estimate.