Repo, reverse repo rates likely to be cranked up - by gyal_good
With the statement on the stance of monetary and credit policy for 2008-09 scant days away, the Reserve Bank of India (RBI) has been reminded of what its central focus should be by the latest inflation numbers.
In the context of abundant liquidity in the system, the reckoning is that the banking system could take this measure in stride without any serious impact on the interest rates. So, will the RBI sent an even more clear signal by an upward revision in the reverse repo and repo rates?
Some such action may be expected as tackling inflation from the demand side makes sense in the current context.
Some tightening of the monetary screws appears inevitable. If the policy rates and tinkering with the reserve requirements via CRR are not deemed sufficient, will the RBI turn its attention to the statutory liquidity ratio also?
With the price situation worsening, one cannot rule out the jacking up of the statutory liquidity ratio. At present, the SLR stands at 25% but the actual ratio is in the vicinity of 30% as of the last Friday of March 2008 —- up from 28% a year ago.
With credit offtake sluggish in the face of a brisk pace of deposit mobilisation, the supply of funds is ample. Banks have parked them in gilt-edged securities to a level more than stipulated.
Hence, if the central bank opts for an increase in SLR to, say, 30%, it will only confer legitimacy to what is obtaining de facto.
Since the average level of SLR is 30%, it implies that the holdings of government paper for many commercial banks are even higher and they would not be hurt by this decision; only those banks with SLR below 30% have to earmark more funds to comply with the new norm.