The Reserve Bank of India’s cash reserve ratio cut of 100 basis pts on Friday has come as a much-needed relief but there could still be a liquidity gap, said bankers and analysts.
That’s because a continuous decline in the rupee and forex reserves — or the dollar sales that ensues — threatens to negate the effects of Friday’s 150 basis pts cut in the cash reserve ratio.
With advance taxes in its kitty, government spending will be coming into the banking system shortly, but systemic gap in liquidity will still continue, say bankers.
“This can hit the rupee afresh, and then you have more dollar sales. Incremental liquidity pressure will then start to build up,” said a fixed-income analyst who did not wish to be named.
With growth rates and inflation drooping, the RBI, he said, is in a better position to use the interest rate weapon now.
But Suresh Ganapathy, analyst with Deutsche Bank, said there is unlikely to be a change in lending and deposit rates.
That would need a repo rate cut. “That is not likely in the next 6 months. There would be a change in lending and deposit rates only after a repo cut,” said Ganapathy.
Which means, it’s back to tackling the ‘impossible trinity’ — the hypothesis which says a central bank can have control over only one of the three: independent monetary policy, fixed exchange rate or free movement of capital.
“The RBI will be confronted with the choice to (a) either allow currency depreciation and maintain the current level of interest rates, or (b) to intervene (buy rupees, sell dollars) in the forex market aggressively to prevent depreciation of rupee against the US dollar but suffer tightening liquidity, Morgan Stanley economists Tanvee Gupta and Chetan Ahya wrote in a note on September 24.
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