Economy

Centre takes steps to drain excess cash

WITHDRAWAL SYNDROME: Following the recall of high value notes, there has been a surge in deposits. File photo

WITHDRAWAL SYNDROME: Following the recall of high value notes, there has been a surge in deposits. File photo  

RBI also announced the auction of 28-day Cash Management Bills for a notified amount of Rs.20,000 crore.

The Centre has decided to increase the limit of bonds that can be issued under a market stabilisation scheme to mop up excess liquidity from the banking system arising out of its demonetisation move.

“Government of India has, on the recommendation of RBI, decided to revise the ceiling for issue of securities under the Market Stabilisation Scheme (MSS) to Rs. 6,000 billion (6 lakh crore),” according to a Reserve Bank of India statement.

Liquidity management

The statement stated the move was aimed to facilitate liquidity management operations by the central bank and the liquidity in the banking system was expected to rise further for sometime.

Bond yields inched up following the announcement which was made during the market hours. The yields on the 10-year benchmark government bond ended the day at 6.24 per cent as compared with its previous close of 6.22 per cent.

Notified amount

The Reserve Bank of India also announced the auction of 28-day Cash Management Bills for a notified amount of Rs.20,000 crore.

The Cash Management Bills will have the generic character of treasury bills, according to the RBI.

“The hike in the ceiling for the Market Stabilization Scheme to Rs. 6 lakh crore will supplement the excess inter bank liquidity that can be absorbed by the RBI through overnight/term reverse repos by offering its stock of Government securities in excess of Rs.7 lakh crore, as collateral,” said Karthik Srinivasan, Group Head, Financial Sector ratings, ICRA.

“This in conjunction with the withdrawal of new currency in excess of Rs.2.5 lakh crore, suggests that the RBI may no longer need the temporary CRR hike to absorb excess liquidity. Therefore, we expect the temporary CRR hike to be reversed with effect from the next reporting Friday,” Mr. Srinivasan added.

Huge inflow

RBI raised the cash reserve ratio (CRR) requirement for banks to 100 per cent for the period September 11 to November 11 and said the move will be reviewed by December 9.

Following demonetisation, the banks received huge inflows of funds as people started depositing old Rs. 500 and Rs.1,000 notes in bank’s and post offices. Till November 27, Rs. 8.45 lakh crore was deposited and exchanged in the banking system, according to RBI data. State Bank of India (SBI) – the country’s largest lender – has received deposits worth Rs.2.2 lakh crore since the currency recall.

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Printable version | Feb 18, 2020 3:01:49 PM | https://www.thehindu.com/business/Economy/Centre-takes-steps-to-drain-excess-cash/article16750787.ece

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