Shaktikanta Das, governor of the Reserve Bank of India (RBI) while announcing the bi-monthly monetary policy on Friday, said it may use Open Market Operation (OMO) sale of government papers to manage liquidity. Das mentioned about the phased withdrawal of Incremental Cash Reserve Ratio (I-CRR) ending on October 7 as part of the RBI's liquidity management exercise.
"Festival time increase in currency demand may, of course, act as a counter balancing factor. It is a turning pitch and we will play our shots carefully. Going forward, while remaining nimble, we may have to consider OMO sales to manage liquidity, consistent with the stance of monetary policy," he said.
The release of the remaining impounded I-CRR funds on October 7 along with pickup in government spending are expected to ease liquidity conditions during the upcoming festival season, he said, while adding that the timing and quantum of such operations will depend on the evolving liquidity conditions.
Liquidity conditions tightened as the Weighted Average Call Rate (WACR), the operating target of monetary policy, increased.
Despite such hardening at the short-end of the term structure, the average term spread in the G-Sec market (10-year minus 91-day Treasury Bills) remained at around 40 basis points in August-September suggesting stable financial conditions, he said. Observing that excessive liquidity can pose risks to both price and financial stability, Das said, the RBI, as a temporary measure, had imposed an I-CRR of 10 per cent which impounded about Rs 1.1 lakh crore from the banking system.
This action was taken to ensure that liquidity conditions evolve in sync with the monetary policy stance, he said, adding that the I-CRR was reviewed on September 8 and is being discontinued in a phased manner, ending October 7.
In recent months, he said, banks have preferred to place funds under the overnight Standing Deposit Facility (SDF) instead of offering them in the main 14-day Variable Rate Reverse Repo (VRRR) operations. It is imperative that banks assess their actual liquidity requirements over the reserve maintenance cycle and bid accordingly in the auctions under main 14-day VRRR operations, Das said.
According to him, it is desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates. Greater volume of call money transactions would not only help in deepening the inter-bank money market but also lower the recourse of deficit banks to the Marginal Standing Facility (MSF), he said.