Reserve Bank of India Deputy Governor Subir Gokarn today signaled the central bank will refrain from cutting the cash-reserve ratio to ease a crunch in the banking system that has driven bond yields to a one-month high.
“The cash-reserve ratio clearly remains an option but we believe that our monetary stance is still anti-inflationary, we are still dealing with inflation,” Gokarn told reporters in New Delhi today. “We don’t want to send any mixed signals about a change in the monetary stance.”
The yields on 10-year government bonds reached the highest level in more than a month as banks borrowed an average 1 trillion rupees ($21.9 billion) a day from the central bank’s repurchase auction window in November, compared with 522 billion rupees a day in October, according to data compiled by Bloomberg.
“The RBI wants to wait and watch for the impact of its measures on liquidity before considering the CRR option,” said R.V.S. Sridhar, head of markets at Axis Bank Ltd. in Mumbai. “The liquidity shortage is quite tight and we would have liked the RBI to consider the CRR option more seriously.”
The yield on the 7.80 percent note due May 2020 rose one basis point to 8.11 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system. The price fell 0.29, or 29 paise, per 100 rupee face amount to 97.96.
“We are using instruments that will give us short-term control over liquidity without in any way compromising our stance,” Gokarn said. “We are using tactical measures like the statutory liquidity ratio.”
Easing the statutory liquidity ratio, or the percentage of deposits banks must invest in government bonds, frees up as much as 500 billion rupees and has an “immediate impact,” he said.
The cash reserve ratio, or the proportion of money banks must set aside to meet prudential guidelines, is 6 percent.
The Reserve Bank of India on Nov. 29 extended a facility to inject funds into the banking system and doubled the level of support to banks by relaxing a requirement to invest in bonds to ease the supply of money.