RBI moves to ease liquidity as govt holds back spending

18 January 2014

The Reserve Bank of India (RBI) will repurchase Rs10,000 crore worth of government securities on 22 January, as part of its open market operations, to inject liquidity into the financial markets.

Since the government is holding on to cash and restricted spending in order to contain fiscal deficit at 4.8 per cent of GDP, RBI said, the liquidity conditions have tightened. The OMO would be undertaken through multi-security auction using the multiple price method, it added.

RBI said there has been a build-up of government's cash balances which may not be utilised in order to meet the fiscal deficit target for this financial year too. This would, in turn, impact credit growth.

The government's cash balance with RBI had shot up to around Rs51,000 crore in December owing to advance tax collections.

The central bank has been conducting 7-days, 14-days and 28-days term repo auctions in order to address the liquidity crunch.

Last week, the RBI injected around Rs54,000 crore on an average daily via various channels like the repo window, marginal standing facility and the term repo window.

''The current assessment suggests that the strain on market liquidity is likely to remain enduring in view of the fiscal targets set for the year as well as projections for aggregate credit growth, warranting the need to provide liquidity of a more permanent nature,'' RBI said.

Bank credit has been growing at a slow pace of 9.4 per cent so far during the financial year against RBI's projection of a 15 per cent growth while growth of deposits stood around 11.1 per cent so far during the fiscal against the 14 per cent growth that RBI had envisaged.

RBI also decided to revise the timings of reverse repo window under Liquidity Adjustment Facility (LAF), which will now be available between 7.00 pm and 7.30 pm instead of the existing timings of 4.45 pm to 5.15 pm effective 20 January 2014.

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