Although the Central bank- Reserve Bank of India- has taken several liquidity-infusing measures to ease situations in the economy yet the system seems to be cash strapped. With banks continuously borrowing under the RBI's liquidity adjustment facility, there is a doubt that arise on liquidity conditions that appeared to ease in the recent past.

On November 6th, banks parked funds worth Rs 31,830 crore with the central bank through the reverse repo under the LAF. This is a facility where banks put extra liquidity with RBI and take bonds to earn interest. The interest under this conditions are already fixed by the RBI and presently it stand at 6%. This interest is referred to as reverse repo rate. On the other hand banks had only borrowed Rs 1,200 crore at 7.5% from RBI through the repo window. This seemed to squeeze cash from the system, where liquidity had been a surplus for sometime.

However this picture started reversing when surplus funds kept with the RBI started falling from November 10th. Also the banks have started borrowing more money from the apex body since then. On November 12th, only 1 bank parked funds worth Rs 15 crore under the LAF and consequently the borrowing from RBI amounted to Rs 10,990 crore by 10 banks.

Treasury head of IDBI Gilts, S Raghavan said that banks got surplus funds because cash reserve ratio (CRR) and statutory liquidity ratio (SLR) set by RBI declined. But at the same time benefits of excess liquidity in the system was partly neutralized due to soaking up of few funds under the Rs 20,000-crore auction of government bonds. This was in addition to the regular issue of treasury bills by the government.

Moreover, growth of fortnight deposits with banks has enhanced the need for CRR and SLR, added Mr Raghavan. Also there is a restriction on banks inter-bank lending which leads to a situation where a bank has to ask RBI for funds even if there is a surplus with other banks.

In October the regulatory body announced several measures to ease liquidity in the system, which was hit by the global financial turmoil. RBI cut the SLR and CRR by 100 and 350 basis points respectively. SLR has been cut down to 24% from 25% of deposits while the CRR has dipped to to 5.5% from 9%.These changes by the RBI released Rs 1,00,000 crore into the system.

Nonetheless liquidity floating in the economy is still under question. Experts feel that unless the RBI signals reducing the reverse repo rate and asks banks to start lending to the corporate, the liquidity situation is not likely to ease.