RBI’s daily mop-up crosses Rs 50,000 cr

Excess liquidity in the economy prompted the Reserve Bank of India to intervene vigorously in the money market through ‘reverse repo’ (in which the RBI sells liquid money market instruments with the promise of buying it back the next working day) auctions on Thursday.

The resultant mop up — in excess of Rs 50,000 crore — made it an intervention of that order for the second day running.

Incidentally, successive intervention in the first three days of October saw the central bank pull out a net sum of Rs 23,480 crore from the system.

On October 1, the RBI’s intervention resulted in Rs 30,400 crore being sucked out of the system on a two-day ‘repo’ (returnable on Wednesday as the previous day was a public holiday). This was followed by an intervention to the tune of Rs 53,520 crore on October 3 making the net intervention being worth Rs 19,520 crore.

On Thursday, the RBI auctioned securities worth Rs 57,480 crore thus pulling out a further sum of Rs 3,960 crore from the market making the cumulative effect of its intervention worth Rs 23,480 crore in reduced liquidity and the meter is still running.

This is the highest since August this year, said bank officials. Market players attribute this glut to the central bank’s intervention in the foreign exchange market to arrest further appreciation of the rupee.

According to Mr Abheek Barua, Chief Economist, HDFC Bank, “Even if the seasonal outflow (advance tax outflow) in the second week of September was coming back into the system, the amount under reverse repo should not have been so high. The huge amount is entirely because of the RBI’s intervention in the forex market.”
Inflation may rise

The surplus (overhang) liquidity could push up inflation, which may touch 6 per cent in the next two weeks, said Dr G.C. Nath, Vice-President and Chief Economist, CCIL.

“There could be a sharp rise in inflation figures in two weeks because consumer prices are still high. Also, the advantage of base effect will not be there,” he said.
No other option

Most bankers and dealers agree that there is no other option but to increase the MSS (Market Stabilisation Scheme) limit, as the RBI has reached 97 per cent of the sanctioned limit. The current ceiling stands at Rs 1,50,000 crore and the outstanding amount is Rs 1,44,000 crore.

“The question is how much the RBI is going to increase the limit. If the amount is increased, it will mean that the Government will have to pay more in terms of interest rates. It is revenue expenditure for the Government. Though Treasury-bills, under MSS, offer higher yield than Liquidity Adjustment Facility (LAF), the RBI has no option but to raise the MSS limit,” Dr Nath said.

Last year the cost to Government was about Rs 3,700 crore. This year it will be over Rs 10,000 crore with the current MSS limit. If the limit is increased, it could go up to Rs 15,000 crore, he added.

In a development late in the evening, the RBI said that the Government is hiking the ceiling under MSS to Rs 2,00,000 crore. It also said the limit would be reviewed on reaching a threshold of Rs 1,85,000 crore.

The central bank said it would, “under the existing arrangements, subject to variations in liquidity, announce every Friday the auctions under the MSS, covering the Treasury-bills and dated securities, if any, for the succeeding week.”
Hiking CRR

Another option with RBI is to hike the Cash Reserve Ratio (CRR) from the current level of 7 per cent. Despite the liquidity surge, banks have not seen credit offtake to the extent they would have liked to see. Also, deposit rates continue to be high, at an average of 9 per cent. This could see banks’ margins coming under pressure.

At a recent press briefing, Dr A.K. Khandelwal, Chairman and Managing Director of Bank of Baroda, said that deposit rates needed to soften. “Unless, deposit rates soften, lending rates won’t come down,” he said.

He added: “Despite the high liquidity, the deposit rates continue to be high. Banks want to sustain their growth momentum and expand their balances sheets, hence, they are not cutting deposit rates.”
SBI plan

Meanwhile, speaking to reporters after a bankers’ meeting with the RBI Governor on Thursday, Mr O.P. Bhatt, Chairman, State Bank of India, said if cash reserve ratio was hiked, “The bank would take a combination of measures – it would absorb whatever it can and pass on the rest to its customers.” He said they did not press the RBI for an interest rate cut at their meeting.

He said that the bank would take a decision on lending rate cuts at its next Asset Liability Committee meeting.