Liquidity is short in the economy and the RBI may intervene with a CRR cut

Liquidity scenario is worsening in the economy with call money rate increasing and banks’ daily liquidity purchase from the RBI nearing to of Rs 2 lakh crores mark.  Overnight call rate has almost reached 10% mark on Wednesday. The call rate is the interbank rate at which a bank borrows money from the interbank market for very short period.

                Usually, the call rate may be quite high during March because it is the closing month of the financial year. During the last few years, call rate mostly hanged around 15% towards the end of March. But this year, the call rate is raising fast even from the beginning of March. If the rate goes up further, the RBI should cut the CRR immediately, without waiting for a formal monetary policy declaration.

                On the repo front, the daily short term borrowing by banks is around Rs 1.9 lakh crores. This high level of accommodation in the last month has compelled the RBI to cut CRR by 50 basis points during the last monetary policy intervention. The repo volume then contracted but now because of the closing month’s liquidity pressure, is going up. From the monetary policy perspective, the call rate of 10% and repo volume of Rs 2 lakh crore are critical points for the RBI to make a liquidity injection measure through a CRR cut.

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