With the banking system reeling under relentless liquidity pressure, market participants say there is a case for the central bank to cut the amount of cash banks are mandatorily required to park with it by 50-100 basis points.
On Thursday, 74 banks collectively borrowed a whopping Rs 1,91,675 crore from the Reserve Bank of India.
Liquidity pressure has been building up gradually in 2011-12 with banks' average daily borrowings from the RBI increasing from around Rs 48,000 crore during April-September 2011 to around Rs 1,17,000 crore in December 2011 and to around Rs 1,33,00 crore in the January-February period.
Though the RBI had cut the cash reserve ratio (the amount of cash banks are mandatorily required to park with it) by 50 basis points to 5.5 per cent, effective the fortnight beginning January 28, 2012, it did not have the desired impact (of easing liquidity tightness).
Key reasons
The reasons for the liquidity pressure, according to Mr Moses Harding, Executive Vice President and Head - ALCO, IndusInd Bank, are that the slippage in fiscal deficit has caused an additional demand of over Rs 1 lakh crore on the system and the RBI has absorbed Rs 50,000-1 lakh crore from the system to defend the rupee.
Further, higher spread over LIBOR and higher cost of conversion (of dollars to rupees) has made dollar funding unattractive to borrowers.
Given the liquidity situation, the expectation is for the RBI to infuse liquidity through the foreign exchange market; continue with 50 basis points cut in CRR and conduct open market operation purchases (of government securities) as and when necessary, explained Mr Harding.
The rate action will be delayed till the April 2012 Annual monetary policy review, he added. As the date (March 15) for making advance tax payments approaches, the liquidity situation will only get aggravated, felt Dr Golaka C. Nath, Senior Vice-President, Clearing Corporation of India Ltd.
There is a case for the RBI to make a 100 basis points cut in the CRR so that primary liquidity of Rs 60,000-65,000 crore is released, he said.