RBI says drawing down excess, statutory ratio can help reduce system liquidity

At a time when excess in the has shrunk considerably, a systemic surplus can be drawn down by drawing down excess and statutory ratio, Governor said on Friday.

The liquidity surplus has dropped to around 1 trillion in the month of April from around 8 trillion, with the system falling into deficit during advance tax outflows earlier this month.

The RBI intervention in the foreign exchange market and a pick up in bank credit growth, which is currently at nine-year highs are a factors that cause the fall in the liquidity surplus.

The interbank call money rate has gone up to three-year highs since last week, with the weighted average call rate now above the repo rate. The monetary policy anchor of the RBI is the weighted average call rate.

The average call rate on Friday was 5.98 per cent, according to the RBI's new repo rate of 5.90 per cent. The repo rate was hiked by 50 bps on Friday.

The temporary moderation of surplus liquidity needs to be seen in the context of the big potential liquidity in the system arising from the expected pick-up in government spending that usually happens in the second half of the year, Das said while detailing the Monetary Policy Committee's statement on Friday.

The drawdown of excess CRR and excess statutory liquidity ratio SLR holdings can also increase system liquidity, he said.

The ratio of CRR is currently at 4.50 per cent, which refers to funds that are mandated to park with the CRR.

The SLR term refers to the portion of deposits that banks must park in highly liquid assets and is mainly comprised of government bonds. The ratio is currently at 18 per cent.

The banks had stocked up on government bonds well beyond the regulatory requirement after the COVID crisis in March 2020. Treasury officials said that the excess SLR in the area was around 9 per cent of deposits.

There is excess SLR by banks. The CD ratio has not gone up much when we look at it. The CD ratio is met by the banks through various sources, including raising commercial deposits as well as bulk deposits, according to RBI Deputy Governor M.K. Jain made a statement on Friday.

The combination of the shrinking liquidity surplus and the need for banks to mobilise funds for loan growth could affect demand for government bonds, market players said.

We can see the weak response in government bond auction cut-offs and I think the market will adjust to higher yields from here. As of now, the RBI has no elbow room when it comes to liquidity because the currency is in focus, ICICI Securities Primary Dealership head of trading Naveen Singh said.

In a way that supported the market was bond index inclusion, but that hasn't happened. The investor appetite may wane as a result of it. We could see demand dwindling a bit. He said by December-end we could be close to 7.70 per cent. The yield on the 10 year government bond was 7.39 per cent on Friday.