RBI Policy
Liquidity to remain tight in next few months, prompting CRR cut
This story was originally published at 17:41 IST on 6 December 2024
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--RBI Das: System liquidity may tighten in coming months
--RBI Das: System liquidity may tighten on tax outflows
--RBI cuts CRR by to 4.00% of NDTL in 2 equal tranches
--RBI Das: CRR cut to release INR 1.16 tln of liquidity
--RBI Das: Cut in CRR consistent with neutral policy stance
--RBI Das on OMOs: Can't spell out what is on the table
--RBI Das: Not indicating anything about future of interest rate cycle
MUMBAI – The Reserve Bank of India projects liquidity to remain tight in the next few months, Governor Shaktikanta Das said Friday. He cited seasonal factors such as tax outflows and increased currency in circulation to cut the cash reserve ratio by 50 basis points to 4.00% of banks' net demand and time liabilities.
"Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows," Das said in his statement outlining the Monetary Policy Committee's decision.
The cut will be in equal tranches, with the first from the fortnight of Dec. 14 and the second from Dec. 28. In his statement, the governor said normalising the CRR was in line with the "neutral" policy stance adopted in the October policy meeting from the earlier stance of "withdrawal of accomodation". Earlier Friday, the RBI's rate-setting panel maintained status quo on the policy stance, and left the repo rate unchanged at 6.50%.
The move is estimated to increase primary liquidity of the banking system by INR 1.16 trillion, Das said. When asked about open market operations, he said he could not answer the options that the RBI was considering. The central bank would base its decision on how the liquidity conditions evolve, the governor said.
"There is surplus today, and perhaps there will be surplus on Monday as well. But we clearly see that we are going into a phase where liquidity is going to be very tight in the later part of this month (December), and continuing into January and perhaps into February," Das said at a post-policy press conference. "So, it was time to normalise the CRR."
Quarterly payments for advance tax are expected to draw out over INR 1 trillion in mid-December. On Thursday, surplus liquidity in the banking system already narrowed down to INR 423.70 billion from INR 2.84 trillion a month ago. Until Nov. 19, banking system liquidity was in a surplus above INR 1.00 trillion. Since then, goods and services tax payments, as well as the RBI's large dollar sales in the second half of November, sharply pulled down system liquidity even into deficit.
Das also highlighted the likelihood of an increase in currency in circulation on account of a busy credit season which will coincide with increased agricultural activity. Going forward, the RBI will remain nimble and proactive in its liquidity management operations to ensure that money market rates evolve in an orderly manner and the rates do not diverge much from the RBI's repo rate of 6.50%, he said. End
Reported by Vidhushi RajPurohit
Edited by Avishek Dutta
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