Bank of America Merrill Lynch said that the RBI may have to inject another Rs 1.6 lakh crore into the banking system through OMOs during the fourth quarter of current fiscal.
The global investment firm Bank of America Merrill Lynch (BofAML) Wednesday said that the liquidity infusion of Rs 40,000 crore by the RBI through open market operations (OMOs) next month may not be enough to defuse the current liquidity shortfall, which is currently as high as Rs 1 lakh crore.
The bank said in a report that the central bank may have to inject another Rs 1.6 lakh crore into the banking system through OMOs during the fourth quarter of the current financial year 2018-19. “Our liquidity model estimates suggest that the RBI will need to OMO another Rs 1,60,000 crore or $22 billion in the March quarter. This supports our call that the government securities market will slip to excess demand by March,” the report said.
RBI said in a notification on Tuesday that it will inject Rs 40,000 crore into the system through bond purchases under its OMO programme in December.
According to the estimates of BofAML, the Indian banking system is running a deficit of about Rs 1 lakh crore, and it could reach Rs 1.4 lakh crore in December, after the advance tax outflows. However, if foreign portfolio investors (FPI) flows remain weak, the investment bank does not rule out the possibility of India’s central bank reducing the cash reserve ratio (CRR) by 1%, it added.
“This will release about Rs 1,20,000 crore into the system and bring the money market to neutral for now. This would then reduce down RBI OMO to Rs 40,000 crore for the March quarter,” the report said. CRR is the minimum amount of deposit that the all commercial banks need to keep with the central bank as reserves. Presently, it stands at 4%.
Moreover, if the prompt corrective actions (PCA) norms are tweaked, that will further restore credit flow to even credit-worthy small and medium-sized enterprises (SMEs), only if there is sufficient liquidity through OMOs by the central bank or CRR reduction. Out of the total 21 banks, 11 banks currently fall under the PCA framework.