At a time when excess liquidity in the banking system has shrunk dramatically, banks can boost systemic liquidity by tapping into the excess cash reserve ratio and the statutory liquidity ratio, the Reserve Bank governor said on Friday. of India, Shaktikanta Das.
From around 8 trillion rupees at the start of April, the banking system’s excess liquidity narrowed to around 1 trillion rupees in September, with the system even slipping into deficit during early tax outflows at the start of the month.
The decline in excess liquidity is due to multiple factors, including the RBI’s interventions in the foreign exchange market and a sharp acceleration in bank credit growth, which is currently at nine-year highs.
Shrinking excess liquidity has driven the interbank overnight money rate to three-year highs since last week, with the weighted average call rate now above the repo rate. The weighted average call rate is the anchor of the RBI’s monetary policy.
Aligning with the new RBI repo rate of 5.90%, the weighted average call rate on Friday closed at 5.98%. The RBI raised the repo rate by 50 basis points on Friday.
“This temporary moderation in excess liquidity should be seen in the context of the significant potential liquidity in the system resulting from the expected recovery in government spending that typically occurs in the second half of the year,” Das said while detailing the policy. monetary. Declaration of the political committee on Friday.
“In addition, reducing the excess cash reserve ratio (CRR) and excess statutory liquidity ratio (SLR) of banks can also increase the liquidity of the system,” he said.
The cash reserve ratio (CRR) refers to the funds that banks are mandated to park with the RBI. The ratio is currently 4.50%.
The Statutory Liquidity Ratio (SLR) refers to the portion of their deposits that banks are required to park in highly liquid assets and consists primarily of government bonds. The ratio is currently 18%.
With the RBI embarking on an extended monetary easing cycle following the COVID crisis in March 2020, banks had stocked up on government bonds well beyond the regulatory requirement. Treasury officials said that currently the SLR surplus in the banking system is around 9% of deposits.
“There is also an excess of SLR by the banks. When you look at the CD ratio, it hasn’t increased much. The additional CD ratio is attained by banks through various sources including collection of commercial deposits as well as bulk deposits,” RBI Deputy Governor MK Jain said on Friday.
The combination of dwindling excess liquidity and the need for banks to raise funds for loan growth, however, could erode demand for government bonds, market participants said.
“We can see the weak cut response from government bond auctions and I think the market will adjust to higher yields from here. Right now the RBI has no margin liquidity maneuver as the currency is the focus,” said Naveen Singh, Head of Trading at ICICI Securities Primary Dealership.
“One thing that was kind of supporting the market was the inclusion in the bond index, but that didn’t happen. Investor appetite might gradually dwindle. We might see demand dwindle a bit. At the end of December, we could be close to 7.70%,” he said.The yield on 10-year government bonds stood at 7.39% on Friday.
At a time when excess liquidity in the banking system has shrunk dramatically, banks can boost systemic liquidity by tapping into the excess cash reserve ratio and the statutory liquidity ratio, the Reserve Bank governor said on Friday. of India, Shaktikanta Das.
From around 8 trillion rupees at the start of April, the banking system’s excess liquidity narrowed to around 1 trillion rupees in September, with the system even slipping into deficit during early tax outflows at the start of the month.
The decline in excess liquidity is due to multiple factors, including the RBI’s interventions in the foreign exchange market and a sharp acceleration in bank credit growth, which is currently at nine-year highs.
Shrinking excess liquidity has driven the interbank overnight money rate to three-year highs since last week, with the weighted average call rate now above the repo rate. The weighted average call rate is the anchor of the RBI’s monetary policy.
Aligning with the new RBI repo rate of 5.90%, the weighted average call rate on Friday closed at 5.98%. The RBI raised the repo rate by 50 basis points on Friday.
“This temporary moderation in excess liquidity should be seen in the context of the significant potential liquidity in the system resulting from the expected recovery in government spending that typically occurs in the second half of the year,” Das said while detailing the policy. monetary. Declaration of the political committee on Friday.
“In addition, reducing the excess cash reserve ratio (CRR) and excess statutory liquidity ratio (SLR) of banks can also increase the liquidity of the system,” he said.
The cash reserve ratio (CRR) refers to the funds that banks are mandated to park with the RBI. The ratio is currently 4.50%.
The Statutory Liquidity Ratio (SLR) refers to the portion of their deposits that banks are required to park in highly liquid assets and consists primarily of government bonds. The ratio is currently 18%.
With the RBI embarking on an extended monetary easing cycle following the COVID crisis in March 2020, banks had stocked up on government bonds well beyond the regulatory requirement. Treasury officials said that currently the SLR surplus in the banking system is around 9% of deposits.
“There is also an excess of SLR by the banks. When you look at the CD ratio, it hasn’t increased much. The additional CD ratio is attained by banks through various sources including collection of commercial deposits as well as bulk deposits,” RBI Deputy Governor MK Jain said on Friday.
The combination of dwindling excess liquidity and the need for banks to raise funds for loan growth, however, could erode demand for government bonds, market participants said.
“We can see the weak cut response from government bond auctions and I think the market will adjust to higher yields from here. Right now the RBI has no margin liquidity maneuver as the currency is the focus,” said Naveen Singh, Head of Trading at ICICI Securities Primary Dealership.
“One thing that was kind of supporting the market was the inclusion in the bond index, but that didn’t happen. Investor appetite might gradually dwindle. We might see demand dwindle a bit. At the end of December, we could be close to 7.70%,” he said.The yield on 10-year government bonds stood at 7.39% on Friday.