Easy liquidity necessary for transmission of rate cuts: RBI

MUMBAI: The Reserve Bank of India has for the first time acknowledged that easy liquidity conditions might be necessary for rate reduction to be passed on to consumers. “Liquidity conditions have been very easy in June and July,” the RBI said.

“A seasonal reduction in demand for currency and increased spending by government, coupled with structural factors such as low credit deployment relative to the volume of deposit mobilisation, contributed to surplus conditions in the money markets.” The easy liquidity conditions should facilitate loan growth and more rate cuts by lenders, it said. Easy liquidity has resulted in lower funds being drawn under the liquidity adjustment facility, a central bank window to lend or borrow short-term money. Banks net borrowed Rs 47,700 crore from the window in June compared with Rs 1,03,100 crore a month earlier. This means, net liquidity injection has more than halved. In July, the banking system turned surplus as banks net parked Rs 12,000 crore with RBI.

“The new liquidity framework enhances monetary policy tools and transmission under inflation-targeting framework,” said Soumya-jit Niyogi, interest rate strategist, SBI DFHI. “Both the cost of fund and availability of fund are actually harmonising between stance and strategies of the monetary policy. The objective of maintaining judicious balance between autonomous and discretionary liquidity requires frequent intervention in market,” he said.

In response to the cut in repo rate in June, the weighted average overnight call rate at which banks lend to and borrow from each other, eased to 7.11 per cent from 7.47 per cent in May. This is supposed to be hovering around benchmark repo rate at 7.25 per cent, in line with monetary policy objective. “… Transmission is not happening as much through banks as through money market rates,” RBI governor RaghuramRajan told reporters. “The free market rates have come down significantly because of the RBI action.”

The RBI also conducted open market bond sales worth Rs 8,300 crore in the second week of July, in response to lack of demand for longer duration reverse repos. The call money rate remained below the repo rate in July, reflecting comfortable liquidity conditions.