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Market sees liquidity easing measures from RBI in monetary policy review

The Reserve Bank of India (RBI) may address liquidity needs in the next bi-monthly monetary policy review to be announced on Tuesday in a bid to take care of the liquidity outflows on account of the last installment of advance tax payment.

According to market participants this may be done by enhancing the term repo window available for banks. In the April monetary policy RBI had increased the liquidity provided under 7-day and 14-day term repos from 0.5% of net demand and time liabilities (NDTL) of the banking system to 0.75%.

“RBI may provide liquidity in the system to take care of productive needs of the economy. RBI may enhance the term repo window to meet the requirement of productive credit. The enhancement can happen to probably 1.25% of banks NDTL for different maturities. This will also help in the development of the term curve,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

The liquidity in the system is already on the verge of being tight and this is evident from the fact that banks have been borrowing from the overnight repo, term repo as well as marginal standing facility window. Besides that despite a cut in the repo rate by 25 bps earlier this month, call money rates continue to trade above the repo rate which currently stands at 7.75%.

As per estimates the advance tax payment sucks out liquidity worth Rs 60,000 crore from the system. “After the advance tax outflow there may be some liquidity crunch and also in fourth quarter there is some seasonal pick up in credit demand. So in advance RBI may be creating liquidity,” said Rupa Rege Nitsure, chief economist and general manager, Bank of Baroda.

The term repo window was introduced by RBI for banks in October 2013 and in August 2014 RBI had decided to conduct more frequent term repos to keep overnight rates close to the repo rate and entice banks to do more efficient liquidity management.

“There are chances that the term repo window may be enhanced to 1%. The enhancement of 0.25% will result in additional liquidity worth Rs 20,000 crore. This kind of enhancement will help to tackle the liquidity squeeze. This will give positive signal to the market in terms of liquidity,” said said the head of treasury of a large state-run bank.

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