Domestic liquidity conditions to ‘stay stretched for sometime'

Domestic liquidity conditions are expected to remain stretched for sometime, according to Dr Subir Gokarn, Deputy Governor, Reserve Bank of India. “For several weeks now, the tightness in domestic liquidity conditions has been highlighted by the fact that borrowing under the liquidity adjustment facility has been significantly above our comfort threshold…... “Some of the tightness is attributable to the smoothing interventions that were carried out in the foreign exchange market. But, that apart, given the overall conditions and the additional pressure, even if transitory, that will be exerted by the advance tax payments in mid-December, domestic liquidity conditions are expected to remain stretched for sometime,” said the Deputy Governor. Pointing out that the RBI has been injecting liquidity into the market through liquidity adjustment facility and open market operations and will continue to do so as conditions warrant, Dr Gokarn said, “we must guard against the risk of excessive accommodation, since this will conflict with our current (anti-inflationary) monetary policy stance.” Currently, the banking system as a whole holds government securities (statutory liquidity ratio) to the tune of 29 per cent of deposits, which is five per cent above the statutory requirement of 24 per cent. This, emphasised Dr Gokarn, reflects a relatively large capacity for liquidity infusions, about Rs 2.74 lakh crore, as and when the need arises. “OMOs are our first preference for liquidity injection, since they are tactical in nature and do not require a change in any policy stance, real or perceived. Further, although, OMOs are currently being used to make those infusions, the LAF window is always available to the system to the extent of this (SLR) surplus capacity. “In addition, the recently established Marginal Standing Facility (MSF) allows banks to use a further one per cent of their SLR holdings, which, given the interest rate structure, they will only do in situations of extreme stress,” said Dr Gokarn in his speech at a CII Summit.

HBL