The Reserve Bank of India (RBI) will be forthcoming with more measures if needed to help ease a cash crunch in the banking system, its head said on Thursday, helping calm bond markets.
"We are studying the issue, we will take some measures as may be necessary. But I cannot really say what and when," Reserve Bank of India (RBI) Governor Duvvuri Subbarao said.
Banks have been borrowing around 1 trillion rupees ($22.1 billion) every day from the RBI's repo auctions since the beginning of November, following withdrawals by depositors for festivals and due to sluggish government spending.
The RBI is buying back up to 120 billion rupees of bonds through an open market operation on Thursday, and the government has reduced the size of its weekly auction on Friday.
The benchmark 10-year bond yield eased 3 basis points to 8.12 percent following the RBI chief's comments, which traders said reassured continued RBI liquidity support.
The yield is down 10 basis points from a 26-month high of 8.22 percent touched on Monday before the OMO was announced.
Subbarao said the cash crunch was due to structural issue such as faster loans growth compared with deposit rise, and frictional factor cause by a build-up in government cash balances following higher receipts from mobile spectrum auctions, divestments and taxes.
"We were expecting that government cash balances will come down, that the government will spend, and that would ease the liquidity situation," Subbarao said.
"The government has started spending, (but) that has not been large enough to ease the liquidity situation."
The government's cash balances with the RBI stood at 910 billion rupees on Wednesday, he said. The balances are normally negligible.
The RBI is widely expected to hold interest rates at a scheduled policy review on Dec. 16 as inflation has been moderating.
The RBI has raised its key lending and borrowing rates by a total of 150 basis points (bps) and 200 bps respectively, since mid-March in its efforts to squeeze inflation back to its target of 5.5 percent by next March.
Annual headline inflation in October was 8.58 percent, its lowest in 10 months, easing slightly from 8.62 percent in September. Inflation was in double-digits for six straight months through July. The data for November is due on Dec. 14.
Subir Gokarn, a RBI deputy governor, said that hardening global commodity prices was the biggest concern for policymakers.
"The fact that prices are going up even in a situation when the overall state of global economy is still sluggish is obviously going to make the challenge of inflation management more difficult," he said.
Subbarao said the RBI would revise its inflation forecast at its Jan. 25 policy review, when it would also revisit the economic growth target.
