RBI hints at another CRR cut as liquidity remains to be tight

Deputy Governor Subir Gokarn today said the Reserve Bank will "consider" a further cut in the cash reserve ratio (CRR) if the systemic liquidity conditions continue to be tight.

Subir Gokarn

"To the extent that an opportunity is available for CRR (which is the percentage of deposits banks have to keep with the central bank,) cut further, we will also consider that," Gokarn, who oversees the monetary policy function at the apex bank, told reporters here.

But ruling out any immediate action, he said there is no change in his earlier statements that if another round of CRR reduction were to happen, it can happen in the policy statement itself and not midway.

Gokarn has been maintaining that a reduction in CRR is a much broader decision which is addressed in the policy rather than the bond buybacks (OMOs) that the central bank has been announcing and carrying out almost on a weekly basis to inject liquidity in the system.
The mid-quarter review of the monetary policy is scheduled for March 15 and it is widely expected that one more CRR cut can be on the anvil.

Alarmed by the liquidity deficit, which had banks borrowing up to Rs 1.20 lakh crore through the overnight window or the LAF, the RBI had cut the CRR by 0.50 percent in the January 24 policy review to 5.50 percent but kept the overnight lending rate unchanged, thus maintaining its anti-inflationary stance intact.

However, in spite of the cut which infused about Rs 32,000 crore into the system, banks continue borrowing over Rs 1 lakh crore from the LAF (liquidity adjustment facility) corridor, much above the RBI's stated liquidity deficit comfort zone of Rs 60,000 crore.

"The issue is in terms of number that the LAF borrowing that we have seen as that is an indication of persistent tightness," Gokarn said, adding the RBI will continue using the OMO option, through which it has injected over Rs 90,000 crore into the system this fiscal, if it feels the need.

He, however, said the situation is very dynamic and said the central bank will not enter into any commitment by announcing an OMO calendar. On the inflation situation, Gokarn said newer issues have emerged as the crude prices have gone up in the recent past following the Israel-Iran imbroglio.

He said Brent crude prices, which occupies for two thirds of the country's imports, have moved up to USD 120 a barrel, at a nine-month high, as against the RBI's baseline assumption of USD 110 and said it will continue monitoring the number.

However, the recent appreciation in the rupee is helping as it offsets the impact of rising crude prices, he added.

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