RBI likely to focus on excess liquidity management: HSBC

Mumbai: Expecting a status quo on the rates on the first monetary policy review of fiscal 2018 tomorrow, a foreign brokerage today said the central bank is likely to announce liquidity management measures given the Rs 4 trillion glut in the market.

"Around Rs 4 trillion of liquidity is sloshing around in the market. The RBI could use the policy day to outline a mix of measures to absorb excess liquidity," HSBC said in a note on the eve of the policy review.

These measures may include details on the introduction of a standing deposit facility (SDF) which will give the RBI an "unlimited capability" to remove excess liquidity.

The SDF was proposed by a panel led by present governor Urjit Patel to look into better functioning of the monetary policy. Since demonetisation, banks are flooded with excess liquidity due to a huge surge in deposits by cash holders with reports saying that over 90 per cent of the banned currency of Rs 15.55 trillion would have found its way back into the system.

The liquidity situation is yet to normalise even after three months of these deposits, while credit demand is muted making it all the more harder for banks to deploy the excess funds, but the high liquidity is hurting RBI fight currency appreciation.

Some some reports said RBI is unlikely to provide any collateral under the SDF while absorbing the surplus funds. The brokerage said domestic uncertainties will result in the monetary policy committee, which started its deliberations today, go in for a status quo tomorrow.

"RBI could well choose to tread a middle path - acknowledge that global pressures have abated, but in the same breath stress that domestic uncertainties remain," it said, adding the market will perceive such a call as "dovish" on the margin. But it stressed that the bar for a rate cut is very high and we are not near a rate cut.

"Some uncertainties regarding the future trajectory of inflation remain: the outlook on the monsoons and the inflation impact of the seventh pay commission on housing allowance and the GST," it said.

The Reserve Bank has achieved the FY17 end target of getting inflation down under 5 per cent but a shift in stance from accommodative to neutral at the last policy, coupled with commentary of getting the price rise down to the 4 per cent level on a sustainable basis has hurt chances of a rate cut.