Indian banks seek relief from liquidity squeeze

Look to the Reserve Bank of India to conduct OMOs.

Indian banks facing a liquidity deficit hope the central bank will conduct more open market operations (OMO) to help them tackle their credit problems. The crunch has been brought on in part by Indian banks investing over US$7 billion every month in government bonds.

The liquidity tightness has ignited a call for RBI to either cut the cash reserve ratio (CRR) or do more OMOs. Bankers widely expect the central bank to announce a CRR cut on January 29 during the third-quarter monetary-policy review.

Banks expect OMOs to US$3.5 billion by the first half of the fourth quarter that ends March. The CRR or the portion of deposits that banks have to deposit with RBI now stands at 4.25%.

RBI has conducted five OMOs since December and infused US$8.6 billion to ease liquidity pressure. In the last OMO conducted on January 4, RBI pumped US$1.4 billion into the system.