Some bankers expect Reserve Bank of India either to cut cash reserve ratio (CRR) in the third-quarter monetary-policy review on January 29 or conduct open market operations (OMO) to overcome liquidity crunch in the banking system.
It is learnt that slow growth in deposit rate, back-to-back auction of government bonds have strained liquidity in the banking system. According to reports, mainly smaller banks face liquidity tightness because of these reasons.
The CRR or the portion of deposits that banks have to park with the RBI now stands at 4.25 per cent. Out of the nine working days in January, banks borrowed around Rs 1 lakh crore or more from the RBI on four occasions.
OMO is a liquidity instrument conducted by buying back government securities from banks and thereby infusing funds into system. It can also be used to absorb liquidity (when it is in excess) by selling to banks government securities.
While CRR is a more permanent measure which carries with it the risk of boosting inflation, OMO is considered a more targeted measure, as it injects liquidity when really needed, according to bankers.
However, some bankers feel that there is no real liquidity crunch, because the statutory liquidity ratio (SLR) of banks is more than required. SLR requires banks to have 23 per cent of their deposits in eligible government securities.