Durable liquidity on tap most welcome

RBI coming up with liquidity measures is a signal that there is a recognition of a problem in the money market. Last week, the central bank said it would inject ₹50k cr every day through the variable rate repo. This would provide much-needed relief to financial market intermediaries. The question is whether it is enough. The quantum of funds injected may be less than what the market needs. But a cumulative effect of its various other fund injections, along with a cut in CRR in the last monetary policy review, provides a breather.

A sudden cause of friction in the money market is due to RBI's intervention in the currency market, where its sale of dollars to slow the slide of the rupee has sucked out liquidity in the system. So, repo auctions are necessary. But they provide only a temporary relief. What the market needs is durable liquidity in the system, which may be possible with another round of cut in CRR, or an announcement of bond purchases in the next monetary policy. Even if the latest one is a baby step, it's welcome. Because this appears to be a shift in the way the central bank deals with liquidity problems. After many years it would be conducting repo auctions, where it lends to banks against government bonds, every day. Till now, it would lend money for longer tenors-say, 14 days-and expect banks to manage their funding needs. That approach unsettled the way banks manage their liquidity. Funds-surplus banks were hoarding more funds than they needed, and those in deficit were scrambling. Return to daily liquidity injection can ameliorate the squeeze in the money market.

But, to reiterate, what is needed is durable liquidity. That can come in the form of another round of reduction in CRR, which would be ideal when it comes with a reduction in the repo rate when MPC meets in February again. The banking system would appreciate a permanent move towards the daily repo auctions, but the central bank has to articulate a shift in the policy, if at all that is what it intends to do.