RBI is comfortable with liquidity operations; withdraws 100 percent CRR norm

The RBI is becoming increasingly comfortable with the liquidity management situation in the context of the aftershocks of demonetisaiton. It has withdrawn the 100% CRR requirement for demonetisaiton deposits from December 10 onwards.

The central bank has not changed policy rate of repo in its latest monetary policy revision.

Earlier the central bank asked banks to keep the full deposits obtained after demonetization with the central bank.  A 100 per cent CRR norm was introduced as a step.

Now after the last review of the Monetary Policy on Wednesday, the central bank withdrawn it and instead is going to relay on the usual Liquidity Adjustment Facility operations and the renewed Market Stabilisation Scheme.

Under LAF, the RBI is using additional measures like variable rate overnight reverse repo operations to withdraw excess liquidity. Similarly, it is absorbing liquidity through the usual day to day reverse repo.

In the case of the other liquidity absorbing mechanism – the MSS, its size is historically high – Rs 6 lakh crore. Such a big volume of MSS shows that RBI can issue government bonds to the tune of Rs 6 lakh crores to banks. This will enable banks to keep their excess deposits in the form of government bonds. An interest reward will also be availed by banks. Here, banks doesn’t suffer any loss as the deposit is compensated by investment in revenue yielding securities.

The LAF and the MSS will now replace the cent per cent CRR.

According to the RBI’s monetary policy statement, it has three issuance of cash management bills under MSS for Rs 1.4 trillion by December 6, 2016. Cash management Bills are debt instruments of less than 91 day maturity.

Also, the central bank has made variable rate reverse repo auctions of a wide range of tenors from overnight to 91 days, absorbing liquidity (net) of Rs 5.2 trillion. Reverse repo auctions are auctions inviting banks to park money with the RBI.

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Tags : rbi monetary policy,liquidity management