Because of the payment of advance tax this week, there has been a huge reduction in cash in banking system and it may be in shortage in the coming days. In view of the situation, the Reserve Bank of India (RBI) has started buying bonds through open market operations.
On Wednesday, the RBI bought bonds of 100 billion rupees, which helped in raising some cash in the banking system. In the short term, the banks borrow from the RBI to meet the cash requirements, but such a move increases permanently in the system. On Tuesday, the cash of Rs 1.32 lakh crore was reduced in the banking system. The short-term capital market instrument like 91-day treasury bills has increased in the midst of cash shortage.
Experts say that the short-term lending rate can increase further, due to the shortage of cash. According to Soumakanti Ghosh, the economist of the State Bank of India, the RBI can now sell at least $ 25 billion and sell it to support rupee. If that happens then after September, the cash in the banking system may be reduced. Issuing a dollar bond to the diaspora can help in stopping the rupee fall, but this will not be a preferred option, as nearly 42 per cent of India’s total external debt is matured in the short term. However, such a move will not cause cash problems in the market.