Rates on short-term paper eased on Thursday after the Reserve Bank of India (RBI) decided to free up funds for the commercial banks to tide over the present liquidity crunch.
According to dealers, rates for three-month commercial paper fell to 8.7%, down by 30 bps as compared with Wednesday after the RBI eased liquidity coverage ratio norms for banks.. Following the fund crunch triggered by the crisis at infrastructure financier IL&FS at the beginning of the month, rates on short-term papers rose by more than 100 bps (basis points) with mutual funds becoming reluctant to lend to the non-banking finance companies.
To ease the situation, the central bank had been infusing liquidity through open market operations. As of September 26, banks had availed ₹1.88 trillion through term repos from the Reserve Bank. “The system liquidity is in ample surplus,” the central bank said.
Earlier in the day, RBI decided to allow banks to dip into their statutory liquidity ratio (SLR) reserves by another two percentage points to meet liquidity coverage ratio (LCR) norms.
The central bank said that banks could ‘carve out’ up to 15% of holdings under SLR to meet their LCR requirements compared with 13% earlier.
SLR is the proportion of funds that banks have to maintain as cash or government securities out of the total deposits that they hold.
The RBI said it “stands ready to meet the durable liquidity requirements of the system through various available instruments,’ going forward.
Injecting liquidity
State Bank of India’s chief economic adviser Soumya Kanti Ghosh wrote in a report that the move would inject about ₹2 lakh crore of assured liquidity at the repo rate. This would ensure the weighted average call money rate to be about the policy repo rate which is 6.5%.
Madhavi Arora, economist, FX & Rates, Edelweiss Securities, said the relaxation would provide immediate relief to the banking system, which had been facing tighter domestic liquidity of more than ₹1 lakh crore. “This should immediately ease off pressure on CD rates and consequently the CP rates,” she said.
The SBI report says RBI may raise the policy repo rate by at least 25 bps with a change in the neutral stance in the next monetary policy review scheduled in October. “We rule out a hike of 50 bps, as it may spook the market. However, there is an outside probability of change in neutral stance too, as three successive rate hikes with a neutral stance could contradict RBI message,” the report said.
RBI had hiked interest rates in the last two policy review meetings by 25 bps on each occasion.
