RBI has achieved desired 'neutral' liquidity in Q1: India Ratings Research

MUMBAI: The Reserve Bank of India (RBI) has successfully turned the banking system to 'neutral' from a high cash crunch zone three-four months ago, a move that will help consumers derive faster benefits from the central bank's policy rate cuts. "The RBI has achieved its desired 'neutral' liquidity in the first quarter itself, mainly on account of Rs 80,000 crore OMO (open market operation) purchases

in the past three months and a reduction in cash in circulation in June 2016," India Ratings Research said in its research report. OMO (purchase or sale) is a mechanism through which the central bank infuses or sucks out cash into the system. The cash crunch in the system was as high as Rs 1.4 lakh crore during the February-March period, the fag end of the financial year FY16. In the last week of June, the system was marginally cash surplus, in the range of Rs 19,700-31,700 crore, according to the report citing RBI data. "The money market rates have stayed on the softer side with the overnight call money rate hovering close to the lower bound of the liquidity adjustment facility corridor." In its April bi-monthly policy, RBI decided to "progressively lower the average ex ante liquidity deficit in the system to a position closer to neutrality". The central bank ensured of smooth the supply of durable liquidity over the year using asset purchases and sales as needed as RBI aims to narrow the policy rate gap to 50 basis points from 100 bps earlier. The repo or policy rate at which banks borrow short term funds from RBI is now at 6.50% versus 6% reverse repo, at which RBI borrows from banks. "In the near term, liquidity requirement will be mostly depend on incremental foreign portfolio flows as well as an increase in currency-in-circulation," India Ratings said.

The benchmark government bond yield has fallen 8-9 basis points to 7.42% pushing prices up in the past 7-10 days. During the last week, foreign portfolio investors were the largest net buyers of government securities at Rs 5,040 crore while state-owned banks sold Rs 6,440 crore.

"Additionally, foreign currency non-resident (B) deposit redemption and an increase in currency-in-circulation from end-1QFY17 will be a major determinant for the next round of OMO purchases."