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RBI To Deploy All Options To Tackle Cash Crunch

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The RBI said on Monday, 6 May 2013,  it will consider all the options available to it to tackle tight liquidity in the market including adjusting banks' cash reserve ratio, and not just confine itself to bond purchases.

"The assumption that OMO (open market operations) will be the preferred tool is wrong, don't go with that assumption," Governor Duvvuri Subbarao said in a conference call with analysts after unveiling the credit policy last Friday.

"We will use all options available to us, depending on how we assess the liquidity situation to be. It could be OMO, it could be CRR (cash reserve ratio), it could be something else."

The RBI kept banks' cash reserve ratio (CRR) steady at 4 percent on Friday while cutting its benchmark policy rate by 25 basis points to 7.25 percent, the lowest level since May 2011.

Expectations of sustained OMOs rose after Subbarao said on Friday "If liquidity is a problem, I think OMOs are as good as CRR, if not better."

To relieve banks from the excessive fund shortage caused mostly due to sluggish government spending, the RBI has bought 1.3 trillion rupees of bonds through its open market operations in 2012/13 fiscal year that ended in March and many economists project the number at around 1.5-1.6 trillion rupees in the current fiscal year.

"OMO expectations went up when the governor made a comment on Friday. Before that we were not expecting OMOs last week because liquidity situation has improved," Manish Wadhawan, Manish Wadhawan, director and head of interest rates at HSBC India.

On Friday, after the close of markets, the RBI said it will buy up to 100 billion rupees of bonds on Tuesday through OMOs.

"The OMOs can still continue. The governor clearly does not want to commit to a particular tool at this point and wants to have the flexibility of using the CRR, if need be," said Anindya Dasgupta, treasurer at Barclays Capital.

Subbarao said that the RBI is in discussion with the government over the auctioning of the government's cash balances with the central bank.

The government's hefty cash holdings, now parked at the central bank, may soon be deposited at commercial banks, sources close to decision making told Reuters in April.