Banks seeking CRR cut over OMO auctions for liquidity infusion

Banks

Bankers and money market participants are hoping for more Cash Reserve Ratio (CRR) cut by the Reserve Bank of India (RBI) rather than more Open Market Operations purchase auctions for liquidity infusion, a number of treasury heads have told Moneycontrol.

Experts believe a 50 basis point (bps) CRR cut can free up around Rs 1.20 lakh crore worth of banks’ liquidity which can be used for lending or parking into money market instruments, thus accruing recurring returns that gets added to the bottomline.

Earlier, Bloomberg News had reported that banks have reportedly approached the RBI seeking better flexibility in how much cash they must hold on a daily basis to meet reserve requirement.

The CRR currently stands at 4% of deposits, which needs to be reported by banks to the RBI on a fortnightly basis. Banks set aside 90% of this requirement daily at present.

The report also said that banks have also urged the regulator to continue its use of daily variable rate repo operations to inject liquidity into the system.

In the last few months, OMO purchases has provided substantial liquidity to the banking system leading to system turning into surplus mode. This, along with rate cut by the RBI, has helped bond and money market yields to soften sharply.

The central bank had started a series of OMO in January this year in order to infuse durable liquidity into a banking system that was reeling under a squeeze.

Later this month, the RBI is scheduled to conduct three more OMO auction, worth Rs 25,000 crore each on May 9, May 15, and May 19, to inject liquidity into the banking system. On top of this, there is also the expectation of more than Rs 3 lakh crore as dividend transfer by the RBI to the Centre.

The banking system’s liquidity had started falling into a deficit after a heavy tax outflow last year, along with slower government spending, RBI's interventions in foreign exchange market and recent selling by foreign portfolio investors in Indian equities.

To support liquidity in the banking system, the RBI has since late-2024 started infusing liquidity by tapping a combination of VRR or variable rate repo auctions, swaps and OMOs.