The Reserve Bank of India on Friday indicated the possibility of injecting more liquidity into the banking system through open market operations (OMOs).
As of today,the liquidity deficit is nearly Rs 1,20,000 crore,RBI Deputy Governor Subir Gokarn said,and offered more such operations if the situation warranted. On using OMOs to infuse liquidity,Gokarn said,the reality of the situation is that OMOs are being driven by the liquidity shortage. It is not driven by the government borrowing requirements. So,I want you to think about an alternative scenario where the repo borrowing is less than Rs 60,000-65,000 crore on a daily basis and yield on the government bond is high. Will RBI do OMOs under those circumstances? The answer is no.
Presenting an alternative scenario where banks repo borrowing is above Rs 1,00,000-1,20,000 crore and T-bill yields are low,Gokarn said in such a circumstance,RBI will continue to conduct OMOs as the driver is liquidity gap and not government bond yields. The aggregate objective of OMOs is to put in a certain amount of liquidity into the market and not help the government borrowings, Gokarn said,talking to reporters at a global investor summit organised by HSBC here.
Regarding rate cuts,Gokarn said,that sort of room for very aggressive and very rapid rate cuts simply does not exist in todays situation. The behaviour of commodity prices is and remains a risk to our inflation and growth outlook.
On whether the RBI is using the CRR and OMOs as liquidity tools,he said,CRR and OMOs are not substitute for each other. The OMOs are quick,short-term and easily implementable instruments,while the CRR has monetary implications and we cannot use it in the same tactical way as we use OMOs because with every CRR action,there is a communication challenge in terms of what it means for the monetary stance.
On January 24,unveiling the third quarter monetary policy,the RBI had cut the CRR which is the portion of deposits that banks have to maintain with the central bank without interest by 50 basis points to 5.5 per cent,but kept its key policy rates unchanged.