The Reserve Bank on Monday hinted at another reduction in the Cash Reserve Ratio (CRR) of banks to ease the severe liquidity in the system but ruled out a cut in the statutory liquidity ratio or SLR, saying that such a move will not create any additional cash flow.
"Space for (more) CRR cut still exists as we need to see significant fall in aggregate deficit," RBI Deputy Governor Subir Gokarn told reporters on the sidelines of a function.
He did not indicate any timeline for the cut.
Gokarn, however, ruled out any cut in the SLR saying, "Reducing SRL will not create any additional capacity in the system at this point of time, because of there is surplus. If SLR is close to the limit, then a reduction is possible, and may have created capacity. But given the situation all instruments are on the table."
On January 24, RBI had cut CRR by 0.5 percentage points to 5.5%, releasing Rs 32,000 crore into the system. Since then, the fund crunch has only worsened.
Last Thursday, the strain on the system rose to high of Rs 1.02 lakh crore. And going forward it will only increase as by March 15 companies will have to make advance tax payments which will drive out Rs 60,000 crore from the system.
Another Rs 12,000 crore is likely to go out of banks due to the ONGC auction last week, and a similar amount will be drained out on account of excise duty payment by companies.
Stating that liquidity deficit is partly structural and partly temporary, Gokarn said, "Current call rates suggest that things are relatively stable (since) there is arbitrage in the market.
"Banks which have surplus SLR can borrow at the LAF (liquidity adjustment facility) and lend through call (money) market to banks which do not have excess SLR. So, the fact that SLR is skewed is not a cause of concern."
Part of the liquidity crunch is temporary, and partly structural and the reason why RBI conducting open market operations consistently is to address that, Gokarn said.
"Part of the structural problem has arisen due to currency operation of the past three months...some of that has been offset by OMOs but it is structural and we are conscious of it," he said.
When asked about his outlook on liquidity as advance tax payment is nearing, Gokarn said, "We are conscious of the advance tax payment-related stress on the liquidity system."
Even though he expressed the hope that crude will not climb too much given the general slowdown in the global economy, he said that rising oil prices will pose added risk to inflation projections.
"Oil prices going up poses a potential upside risk to inflation. On the other hand, growth has slowed… it is likely that producers don't have the pricing power which they had earlier," Gokarn said.
He also said that inflation management is the primary driver of monetary policy and that growth is not the core driver of monetary policy.