When the central bank had reduced (Cash Reserve Ratio) CRR in the Monetary Policy for the current fiscal year 2013-14 to support private sector lending that could propel the economic growth, it had no idea the excess liquidity in banks and financial institutions is going to fuel inflation only.
Six months down the line, the banks and financial institutions are bulging with cash and private sector is still in 'wait and watch' mood, not really borrowing compared to the last fiscal, forcing the central bank to mop up excess liquidity every alternative week.
The central bank is all set to introduce the eighth round of reverse repo – tomorrow – to absorb excess liquidity from the financial system for seven days.
The reverse repo worth Rs 19.5 billion. So far the central bank had already issued seven reverse repo worth Rs 126.5 billion, apart from an outright sale auction worth Rs 8.5 billion in September to absorb liquidity from the banks and financial institutions.In the last two rounds of reverse repo held last week, the weighted average reverse repo rate stood at 0.07 per cent.
The banks and financial institutions have been sitting on around Rs 70 billion excess liquidity that is expected to flow to stock market.