Mumbai: Reserve Bank Governor D Subbarao Wednesday said the cash reserve ratio (CRR) cannot be presumed to be the preferred tool to address liquidity situation at the mid-quarter review slated for December.
"There can be no presumption that CRR will be the preferred tool to deal with a liquidity situation in December. Our action yesterday should ensure that liquidity is within the range that we indicated through December.
"But, should there be a liquidity deficit, that will depend on how we will assess the shortage, whether it is temporary, permanent or whether it calls for some action," the Governor told analysts at a customary post-policy conference call this afternoon.
He was answering a query whether CRR will be the preferred tool in December.
Subbarao also said the central bank expects liquidity constraint to persist beyond the festive season and therefore it took action, by reducing CRR by 0.25 percent, on Tuesday.
After a comfortable liquidity situation in the system in the past, the overnight borrowing by banks has shot up to over Rs 1 lakh crore in the recent weeks.
One percent of 'Net Demand and Time Liabilities' (around Rs 60,000 crore) is the comfortable level for RBI as far as liquidity is concerned.
In its half-yearly monetary policy review yesterday, the bank left the key interest rates unchanged but reduced CRR by 0.25 percent to 4.25 percent to infuse additional liquidity of Rs 17,500 crore to address the liquidity deficit.
As to whether RBI will intervene in the forex market to build up forex reserves, Subbarao said it won't. "Whether we will intervene to increase the forex reserves, the answer is no," he said, adding that RBI has a stated stance of intervening in the market only to check extreme volatility.
"We don't believe that we should intervene to build up the reserves. If the reserves can be built up as a consequence of intervention to curb exchange rate volatility, that is an incidental by-product," Subbarao said.
Referring to possible rate action in January as indicated in the policy document, the Governor said it would depend on the growth-inflation dynamics.
"If the growth and inflation trajectory are played out as per the projections now, we believe that there is scope for easing in January."