Liquidity: How Does it Affect You

The Reserve Bank of India (RBI) is focussing more on liquidity rather than rate cuts. The move is primarily aimed at making rate cut benefits

available to all. ET explains liquidity management:

Contd….1. What is liquidity?It is the money available in the banking system. This includes currency and reserves. A liquidity deficit is a cash crunch while a surplus suggests excess of funds. On a daily basis, the central bank, infuses and sucks out funds, responding to the need of the hour like fund outflows and inflows from the banking system.2. Why has the RBI shifted focus?Beginning January 2015, the RBI started reducing interest rates, only to find that transmission of the benefit to consumers was slow. This has prompted the RBI to focus on liquidity management, a tool that can help bridge the gap.3. What do they do?RBI is conducting more openmarket operations (OMOs) to purchase bonds from market participants via the auction process, a move that infuses money into the system as banks and bond houses receive funds by selling securities.

Contd…So far this fiscal (April-May), it has conducted OMOs for `70,000 crore, significantly higher than the OMOs a year ago. The central bank also lends overnight or short-term funds to banks via other borrowing windows like variable repos.4. How does liquidity impact rates?Funds shortage leads to spike in shortterm borrowing rates, which block banks from cutting lending rates. This also results in a rise in bond yields. If the benchmark bond yield rises, corporate borrowing cost too, increases. Companies raise funds by selling corporate bonds, which are priced after adding a markup to the benchmark yield. Consequently , borrowers pass on the higher cost to consumers, which is again inflationary . This defeats the purpose of a soft interest-rate regime.5. What is the current status?The country now has a liquidity deficit.As per RBI data, the average daily net liquidity injection declined to `12,000 crore in June (up to June 5) from `1.03 lakh crore in April-May and `1.94 lakh crore in March. Over a period of time, the RBI plans to erase the deficit, taking it to the neutral mode.

Contd…6. Can FCNR(B) maturities during Sept-Nov period upset the equation?It can, temporarily , but the RBI looks well prepared to weed it out. As much as $20 billion (about `1.34 lakh crore) in fund outflow is expected during that time, as those schemes, placed more than two years ago to stem the rupee's free fall, mature.The central bank may have to conduct OMO purchases as high as `1.7 lakh crore, at least, says a report by SBI.

For Details and Appointment contact:-

Parveen Kumar Chadha… THINK TANK

(Founder and C.E.O of Saxbee Consultants & Other-Mother

marketingandcommunicationconsultants.com)

Email :-saxbeeconsultants@gmail.com

Mobile No. +91-9818308353

Address:-First Floor G-20(A), Kirti Nagar, New Delhi India Postal Code-110015