Several economists from institutions such as Standard Chartered Bank and ICICI Securities Primary Dealership have projected a cut in the cash reserve ratio (CRR). Some treasury heads also said that the central bank could undertake long-term repo operations or open market operations (OMO purchases) to infuse liquidity into the system.
Economists said that headline liquidity will be in a deficit of Rs 1 lakh crore to Rs 1.5 lakh crore while durable liquidity will be marginally negative due to seasonal increase of currency in circulation, advance tax payments and outflows from foreign exchange reserves. The need to provide support is felt mainly because the RBI changed the policy stance to ‘neutral’ from ‘withdrawal of accommodation’ last October. A 25 basis point cut in CRR could infuse Rs 58,000 crore liquidity into the banking system.
“As of now, durable liquidity is at a surplus of Rs 2 lakh crore, but will be marginally negative by the end of this fiscal year and headline liquidity is likely to be in a deficit of over ?1 lakh crore. This is because, in the remainder of the four months, there will be an increase in currency in circulation, plus the balance of payment surplus narrowing due to large foreign exchange outflows have also added pressure on liquidity,” said Anubhuti Sahay, head of India economic research at Standard Chartered Bank.
The routine pressure on system liquidity is usually offset by foreign portfolio inflows, or with the government drawing out large amounts. But even if FPI flows are positive, the net dollar inflows are unlikely to be large enough to offset the outflows, along with the expectation of limited cash drawn from the government, economists said. Pressure on liquidity will further increase if foreign exchange flows remain negative for the rest of the fiscal year.
To make liquidity more comfortable, market participants expect a CRR cut to 4% from 4.5%, open market operations, particularly OMO purchases or longer-term variable rate repo auctions to infuse liquidity, Axis Mutual Fund said in a note.”The RBI has a cushion of 50 bps additional CRR from May 2022. A CRR cut may be the appropriate tool, as banks would be able to better manage liquidity, in light of expected LCR tweaks,” said Devang Shah, head-fixed income at Axis Mutual Fund. “Core liquidity can turn negative if there are no foreign exchange flows over the next calendar year. In such a case, the RBI might have to intervene with a 50 bps CRR cut or OMOs totalling ?1 lakh crore,” he said.In the past couple of years, there was no need for durable liquidity infusion through a CRR cut or OMO operations due to significant foreign exchange inflows and a hefty dividend of Rs 2.1 lakh crore to the government.