The Reserve Bank of India (RBI) is exploring options to improve market stability by sucking out excess liquidity from the system. According to market sources, the RBI may advance the auction calendar and expedite the government borrowing programme.

This will serve two purposes: excess liquidity from the system could be mopped up through bond issuances, while market players such as mutual funds will have additional avenues to park their funds.

Market sources said the banking regulator is concerned that the excess liquidity could makes it way into the equity market and fears that this could result in small investors getting caught on the wrong side at a time when the market was experiencing extreme volatility.

RBI is also believed to have been discussing with the capital market regulator, the Securities and Exchange Board of India (Sebi), to kick start initiatives for developing the corporate bond market. Sources added that the idea was to develop alternate instruments for market players to channelise the surplus funds.

The RBI re-launched the market stabilisation bonds in the new financial year to drain excess liquidity from the system, which is signified by the over Rs. 60,000 daily mop-up through the reverse repo window.

In March, there was acute shortage of funds and there was pressure on the central bank to slash banks’ cash reserve ratio to release funds into the system.

The new financial year witnessed increased government expenditure, slowdown in credit pick up and redemption of few government bonds.

The government proposes to borrow around Rs. 89,000 crore in the first half of the financial year. In its April policy statement, the RBI had hiked the provisioning requirement and risk weights for banks’ exposure to real estate, home loans and equity market as a prudential measure.

(www.business-standard.com)