The Reserve Bank of India (RBI) said on Monday that it will consider all the options available to it to tackle tight liquidity in the market including adjusting banks' cash reserve ratio, and not just confine itself to bond purchases.
"The assumption that OMO (open market operations) will be the preferred tool is wrong, don't go with that assumption," RBI governor Duvvuri Subbarao said in a conference call with analysts after unveiling the credit policy last Friday.
"We will use all options available to us, depending on how we assess the liquidity situation to be. It could be OMO, it could be CRR (cash reserve ratio), it could be something else," Mr Subbarao added.
The apex bank kept banks' cash reserve ratio (CRR) steady at 4 per cent on Friday while cutting its benchmark policy rate by 25 basis points to 7.25 per cent, the lowest level since May 2011.
Expectations of sustained OMOs rose after Mr Subbarao said on Friday: "If liquidity is a problem, I think OMOs are as good as CRR, if not better".
To relieve banks from the excessive fund shortage caused mostly due to sluggish government spending, the RBI has bought Rs 1.3 lakh crore of bonds through its open market operations in fiscal year 2012-13 and many economists project the number at around Rs 1.5-1.6 lakh crore in the current fiscal year.
"OMO expectations went up when the governor made a comment on Friday. Before that we were not expecting OMOs last week because liquidity situation has improved," Manish Wadhawan, Manish Wadhawan, director and head of interest rates at HSBC India.
On Friday, after the close of markets, the apex bank said it will buy up to Rs 10,000 crore of bonds on Tuesday through OMOs.
"The OMOs can still continue. The governor clearly does not want to commit to a particular tool at this point and wants to have the flexibility of using the CRR, if need be," said Anindya Dasgupta, treasurer at Barclays Capital.
Mr Subbarao said that the RBI is in discussion with the government over the auctioning of the government's cash balances with the central bank.
The government's hefty cash holdings, now parked at the central bank, may soon be deposited at commercial banks, sources close to decision making told Reuters in April.
Copyright @ Thomson Reuters 2013
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