A 50 basis-points cut in the cash reserve ratio (CRR) appears imminent with money markets remaining acutely short of liquidity. The Reserve Bank of India (RBI) is scheduled to meet on March 15, 2012, to review monetary policy and give some guidance on growth and inflation trends for the coming year. Although some economists believe the cut could be restricted to 25 basis points, others say the central bank would infuse more liquidity right now and withdraw it later. Subir Gokarn, deputy governor, RBI observed earlier this week that there was room for a CRR cut since there needed to be ?a significant fall in the aggregate deficit?. A reduction of 50 basis points in the CRR, or the cash that banks set aside as a share of their demand and time liabilities, would free up some R32,000 crore. The RBI last pruned CRR by 50 basis points to 5.5% in late January.
Banks have been short of money as reflected in the high daily average borrowings from RBI?s special window of Rs 1.5 lakh crore. The shortage has been exacerbated by the recently concluded elections, which have left more money in circulation, and is expected to increase as companies pay their last tranche of advance taxes by March 15, 2012, which could amount to around R60,000 crore. Over the past three months, currency with the public has increased by close to R70,000 crore; for the fortnight ended February 24, growth in deposits for the banking system was 14.3% year-on-year. In the last two months, the gap between credit and deposit growth has widened temporarily.
The liquidity deficit is also the result of the central bank intervening in the foreign exchange markets. Between September and December the RBI sold $12.5 billion and also $3 billion in the forward markets which has drained out some R80,000 crore. While the rupee had strengthened from its December lows rising to levels of 48.65 levels against the greenback, the currency has weakened over the past week slipping below the 50-mark.
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On Tuesday, the rupee hit a six-week low of 50.37 and the currency could remain weak as crude oil prices remain well above the $120 per barrel mark.
While the central bank does want a liquidity deficit to the extent of one percentage of the net demand and time liabilities, the shortage is nearly three times that. That?s after the RBI cut CRR by 50 basis points in mid-January to free up Rs 36,000 crore. Moreover, the central bank has infused liquidity into the system through open market operations to the tune of Rs one lakh crore. However, there has been a sharp spike in short-term rates to levels of 11%. Interestingly, banks are holding excess government securities in excess of the mandated 24% statutory liquidity ratio. Deputy governor Gokarn had pointed out that reducing the SLR would not create additional capacity in the system since there was a surplus.