Liquidity will be factor in Monetary Policy Review in April: RBI

Mumbai, April 6 (IANS) The RBI on Thursday hinted that the fall out of demonetisation, whereby the banking system is flushed with liquidity adding to inflationary pressures, could be a factor in its holding rates in the April policy review.

"With progressive remonetisation, the surplus liquidity in the banking system declined from a peak of Rs 7.96 lakh crore on January 4, 2017, to an average of Rs 6.01 lakh crore in February, and further down to Rs 4.81 lakh crore in March," the Reserve Bank of India said in its first bi-monthly monetary policy review for the current financial year.

The Indian central bank expects the quantum of durable surplus liquidity to come down in next few quarters, it said.

"The average net absorption by the Reserve Bank increased from just over Rs 2 lakh crore in January to Rs 4.48 lakh crore in March," it said.

"Currency in circulation expanded steadily during this period. It is in this context that greater clarity about liquidity management is being provided, even as surplus liquidity is being steadily drained out," it added.

Holding its repo, or the short-term rate at which it lends to commercial banks, unchanged for the third consecutive time at 6.25 per cent, the RBI said in its policy statement on Thursday: "The decision of the MPC (Monetary Policy Committee) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth."

At its sixth and final monetary policy review of 2016-17 in February, the RBI had kept its repo rate unchanged at 6.25 per cent while changing its policy stance from "accommodative" to "neutral", saying it awaited more data on inflation and on the impact of demonetisation.

"By shifting the stance of monetary policy from accommodative to neutral, there will now be sufficient flexibility to move the policy rate in either direction, depending on future data outcomes and projections, to help ensure that inflation is brought closer to 4 per cent," the RBI said.

In an attempt to manage the liquidity surplus following demonetisation of Rs 500/1,000 currency notes, the central government has revised the ceiling for issue of securities under the Market Stabilisation Scheme (MSS) to Rs 6 lakh crore from Rs 30,000 crore.

Bills issued under MSS, however, were redeemed earlier this year and the money withdrawn earlier has come back into the system.

Experts had expected the RBI to announce some measures to absorb additional liquidity in the system following the November 8 demonetisation.

"In the post-demonetisation period, aggregate deposits have increased by Rs 4.27 lakh crore. Our estimates now indicate there would be a permanent liquidity injection of least Rs 1.7 lakh crore or 1.1 per cent of GDP," state-run State Bank of India said in a report earlier this week.