Subbarao assures various options to tackle liquidity crunch

D SubbaraoReserve Bank of India osays it will consider all the options available to tackle tight liquidity in the market. (Reuters)

The Reserve Bank of India on Monday said it will consider all the options available to it to tackle tight liquidity in the market, including adjusting banks' cash reserve ratio (CRR) and open market operations (OMO).

In his post-policy conference call with analysts, Reserve Bank of India Governor D Subbarao said, "We will use all options available to us, depending on how we assess the liquidity situation to be. It could be OMO, it could be CRR. It could be something else."

"The assumption that OMO will be the preferred tool is wrong, don't go with that assumption. Our objective is to maintain liquidity at plus or minus 1 per cent of NDTL (net demand and time liabilities). We have actively managed liquidity conditions. Liquidity situation should be less uncomfortable going forward. We have also indicated that we will actively manage liquidity. Consistent with that policy, we have announced an OMO of Rs 10,000 crore," he said.

On Friday, the RBI kept CRR unchanged at 4 per cent while slashing repo rate by 25 basis points to 7.25 per cent. As and when the difference between deposit and credit growth rates lessens, the tight liquidity condition will further ease. Currently, banks are borrowing close to Rs 90,000 crore from RBI through the overnight window, which is above the central bank's comfortable level of 1 per cent of NDTL at Rs 60,000 crore, he said. As per reports, the government's cash balance is close to Rs 1 trillion, which can significantly ease liquidity situation as the government starts spending. However, the RBI prefers liquidity to be in deficit mode given the upside risks to inflation. "Liquidity issues will likely be addressed through a mix of CRR cuts and OMOs, leaning more towards OMOs in the near term," said Indranil Pan, chief economist, Kotak Mahindra Bank.

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