Banks have a problem. Despite the repo rate cut, they find it difficult to borrow from RBI?s liquidity adjustment facility, as they need collateral. This collateral has to be debt paper of the same grade they buy to meet their SLR requirements of 25% of incremental deposits. That grade of paper is in short supply.
The finance ministry has accorded SLR status only to debt paper issued as part of the market borrowing programmes of the state and Central governments?paper of more than one-year tenure used to bridge fiscal deficits. Since the national fiscal deficit has whittled down to 2.5% of GDP this fiscal, the Centre expects to issue only Rs 1,45,000 crore worth of such debt paper this year. Of this, it has already issued Rs 96,000 crore until the end of September.
To ensure banks do not again run into tight liquidity conditions at a time when the interbank money market has become very thin, the government is mulling an increase in the supply of SLR paper through additional borrowing. Prime Minister Manmohan Singh gave an indication of this in his suo moto statement in Parliament on Monday. He endorsed increased public expenditure, saying ?our expenditure will stand us in good stead in these difficult times?.
This would mean a relaxation in the fiscal deficit constraint on similar lines to what has been done by governments in Europe and the US. Such a course is considered more suitable than an SLR cut as demanded by some banks. ?The exigencies of the government?s borrowing programme will prevent any outright cut,? said Saugata Bhattacharya, vice-president, business & economic research, Axis Bank.
Oil marketing companies have also asked for inclusion of debt paper issued to them in the SLR list. But that has not found favour with North Block.