Mumbai: Reserve Bank Governor D Subbarao on Monday said the Reserve Bank will consider all options available, including reducing the cash reserve ratio (CRR), to manage liquidity in the system. "The assumption that OMOs will be the preferred tool is wrong. Don't go with that assumption. We will use all options available to us depending on the liquidity situation... it could be OMOs, it could be CRR (cut) or it could be something else...," Subbarao told analysts during the customary post-policy conference call in Mumbai.
Stating that liquidity squeeze is likely to be 'less uncomfortable' in the coming months as the government starts spending, he said: "Our objective is to maintain liquidity at plus or minus 1 per cent of NDTL. We have actively managed liquidity conditions....and it should be less uncomfortable going forward. We have also indicated that we will actively manage liquidity. Consistent with that policy, we have announced an OMO of Rs 10,000 crore on Friday," Banks are borrowing close to Rs 90,000 crore from the RBI through the overnight window, which is above the central bank's comfortable level of 1 per cent of NDTL (net demand and time liabilities) at Rs 60,000 crore.
He further said as and when difference between deposit and credit growth rates lessens, the tight liquidity condition will further ease. Despite the high liquidity deficit, the RBI had kept the CRR --portion of deposits that banks keep with RBI--unchanged at the annual policy announcement, saying the liquidity shortage was not a structural issue, but had said it would actively manage liquidity to ensure adequate credit to the productive sector. Referring to the proposal to auction government cash balances to banks, Subbarao said the central bank is in discussion with the government on this. But he was quick to add that the proposal if materialised will not change the overall liquidity situation.
Earlier, there were reports that the government might auction its cash balance, which is close to Rs 1 lakh crore, to banks. Subbarao also said economic growth, which is likely to be modest in the first half, could pick up in the second half. To a question on the rising house prices, the governor said: "There is no housing price bubble building up in the country." Referring to monetary policy transmission, Subbarao said the RBI expects base rates of banks to come down in the coming months, adding that as yields on government securities come down, money will be cheaper to that extent for corporates.
On the high current account deficit (CAD) level, he said CAD of 2.5 per cent of GDP is sustainable and the present level of 6.7 per cent in Q3 of last fiscal is way above the limit and that RBI prefers low CAD funded by stable non-debt flows like FDI.
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