The Reserve Bank of India (RBI) is unlikely to increase cash reserve ratio for banks at its policy review on Friday as the current surplus in the system is just adequate to meet likely fluctuations, a senior treasury official said.
A Reuters poll showed that 24 of 25 economists expect a 50 basis-point increase in the cash reserve ratio (CRR), or the proportion of deposits banks must keep with the RBI, to 5.5 percent.
However, as a CRR hike is a medium-term tool, policymakers must be sure that the surplus liquidity will sustain in the medium to long-term before hiking the ratio, said Mohan Shenoi, head of treasury at Kotak Mahindra Bank Ltd. in Mumbai.
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"Only if we are 100 percent sure that, at least in the medium-term, if not in the long-term, liquidity can be sucked out through increasing CRR, then only we should do that," he told Reuters in an interview.
Quarterly advance tax outflows suck out about 400-500 billion rupees from the system for 15-20 days. Banks also need up to 300 billion rupees of cash to adjust for intra-day cash flow fluctuations in the overnight money markets, he said.
"So I think in today's circumstances, 600-800 billion rupees is the minimum required level of liquidity." Surplus cash, as seen in the central bank daily reverse repo auctions averaged about 720 billion rupees a day this month.
RBI may increase the reverse repo rate by 125 basis points and repo rate by 75 basis points by end-March 2011, Shenoi said, adding that for the next 1-2 years, he expects the reverse repo rate to be the operative rate of the central bank.
The reverse repo rate is at 3.25 percent and the repo rate stands at 4.75 percent.
To have the reverse repo rate as the operative rate, we need to keep ample liquidity in the system, Shenoi added.
TOOLS - FISCAL AND MONETARY
If liquidity is kept ample, gradually hiking the reverse repo from 3.25 to 4.5 percent may not have too much impact on the interest rates, Shenoi said.
However, the fiscal policy must be in order as using monetary policy as the first line of defence instead of as a last resort measure will have its own implications in the market, he said.
"What can have immediate impact on interest rates is fiscal policy and that depends on the budget."
Kotak Mahindra Bank expects the gross borrowing for 2010/11 fiscal to be at 4.5 trillion rupees and sees little or no room for open market purchases (OMO) by the central bank this time.
Shenoi predicts a tougher bond market in the year to come adding that only prudent fiscal measures can guide the economy to better growth prospects.
The bank sees the 1-year T-bill yield at 5.5 to 5.75 percent and the 10-year bond yield at 8.5-8.75 percent, by end-March 2011.
The Indian rupee's strength will be limited because of the inflow-outflow dynamics and India's core current account deficit, he said. The partially convertible rupee traded at 46.2350 at 3:45 p.m. (1015 GMT).
"In my view, 44.80 is the level beyond which it cannot go that easily. Whenever these flows are absent, you will find it again going down. It will be a broad range of 44.80 and 46.80.
He also said the political climate looks supportive for the government to take reformative steps.
"The next 1-2 years will be dominated not by politics, but by the compulsions of growth versus fiscal deficit and growth versus inflation."
"Nothing major is there which can upset the applecart."
