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Only Rs 3.5 lakh crore of the Rs 10 lakh crore in durable liquidity is actually available to banks, says Governor Sanjay Malhotra.
RBI Governor Sanjay Malhotra.
The Reserve Bank of India expects surplus liquidity in the banking system to decline soon, with only Rs 3.5 lakh crore of the Rs 10 lakh crore in durable liquidity available for banks, Governor Sanjay Malhotra told Moneycontrol. He said the surplus was temporary and unlikely to worsen credit quality or fuel inflation.
“The amount available to banks, therefore, is limited and will be managed through the measures we have already taken and those we plan to take, apart from natural CIC (currency in circulation) leakages; our interventions; and additional reserve requirements arising from the deposits,” Malhotra said in an interview. “In our assessment, the current liquidity situation is for the short-term. There’s no reason as to why this liquidity will lead to either a deterioration of credit quality or lead to either a deterioration of credit quality or lead to inflation.”
The RBI has been draining surplus funds through variable rate reverse repo (VRRR) operations. Explaining banks’ preference for shorter-tenure liquidity absorption operations, he said: “Exactly. The fact that banks are not subscribing less to a 28-day or 29-day variable rate reverse repo (VRRR) operation shows that they do not have that level of liquidity available for the longer period.”
He added: “Liquidity is not as high as it is being made out to be, primarily because government balances are shown as included in the measure of durable liquidity. While they technically form part of it, in practice, they are not available to the market for use.”
The RBI expects the weighted average call money rate (WACR), its operating target, to align with the policy repo rate shortly.
“We have aimed to keep the operating target, which is the weighted average call money rate (WACR), aligned to the policy repo rate. So you will very soon find that it is aligned,” Malhotra said.
Malhotra also defended the early closure of RBI’s special FCNR(B) deposit window, saying the expected inflows through three foreign-currency mobilisation schemes were sufficient.
“No, I think the dollars that we are now estimated to get, roughly about $150 billion, including all three schemes, are substantial, and we have other measures which we have rolled out recently,” he said.
Introduced in June, the special dollar-rupee swap scheme covered FCNR(B) deposits, overseas foreign currency borrowings and external commercial borrowings. By September 18, the three channels had mobilised $143.596 billion, including $132.98 billion through FCNR(B) deposits alone. The FCNR(B) window closed to fresh eligible deposits on August 31, while the other two channels remained open until December.
The comments come amid pressure on the rupee from elevated crude oil prices and foreign capital outflows. On October 10, the RBI announced a special dollar-supply window for Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation to meet their daily dollar requirements outside the spot market. It also cut the threshold for forex derivative transactions without established underlying exposure from $100 million to $5 million and barred the rebooking of cancelled rupee-linked derivative contracts. Separately, it introduced a 20 percent foreign exchange risk reserve for specified derivative transactions exceeding $2 million and raised the daily cash reserve ratio maintenance requirement to 99 percent from 90 percent from October 16.
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Ask News18RBI Governor Sanjay Malhotra stated that the surplus liquidity in the banking system is temporary and expected to decline shortly, driven by natural currency in circulation leakages, central bank interventions, and additional reserve requirements.
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