of the next week's credit policy review. As against an outgo of Rs
18,500 crore towards the cash reserve ratio (CRR) over the next two
fortnights, banks are parking surplus funds, in the range of Rs
20,000-25,000 crore, with the Reserve Bank of India (RBI) on a daily
basis.
Taken together — funds floating in the call money market, the market
for collateralised borrowing and lending obligations (CBLO) and funds
parked by banks with the central bank under the reverse repo window —
surplus cash flows in the market could be closer to Rs 1,00,000
crore.
Treasury officials say that such surplus cash conditions may surely
prompt RBI to announce further rate actions. Measures could include
selling more bonds under the market stabilisation route and a hike in
key rates — repo and reverse repo rates.
It may be recalled that cash conditions had turned extremely tight in
the last week of March. However, the situation improved in the first
week of April, as the government resumed its spending programme. Apart
from government spending, some amount of intervention by the central
bank in the foreign exchange market could have also led to improvement
in the liquidity scenario, according to treasury managers.
A senior dealer with a private sector bank said, "There are reasons
for the ample cash conditions seen at the moment. There has been a
lower-than-expected bond auction under the market stabilisation route
this week. Secondly, RBI was intervening heavily in the forex market,
buying dollars in the spot market and selling them in the
forwards market. The unwinding of these contracts has brought in more
liquidity into the system."
Most market participants are on a wait-and-watch mode, as the CRR hike
will be effective only from April 26. So, the actual impact can be
seen trickling in only from next week. Traders in the bond market are
divided over their views on the monetary policy.
The broad consensus is that the current hike in the CRR to 8% may not
suffice to tackle rising cash flows and spiralling inflation. This may
leave RBI with no option, but to tighten rates. However, some players
feel that the impact of the CRR hike cannot be comprehended before the
announcement of the annual policy review. Given that the second phase
of the hike would be in force only after May 10, the real effect of
the move may be evident only by
mid-May or early-June.
STCI Primary Dealer's Pradeep Madhav said, "Since controlling
inflation is at the top of the central bank's agenda at present, we
may see another CRR hike at some stage, if the central bank believes
that the surplus liquidity is causing inflation. A hike in repo rates
is also another strong possibility."
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