Stating that some deficit in liquidity is desirable, Reserve Bank Deputy Governor Subir Gokarn, on Saturday said in the last few weeks, however, the liquidity situation has gone beyond what the RBI feels is the positive gap and hence is taking measures to ease it.

“We moved to a deficit liquidity situation in end May or early June. But in the last few weeks it has gone beyond what we think is a normal or a positive liquidity deficit,” Mr. Gokarn said in his address at a CII event in Mumbai.

He pointed out that over the past few weeks, the RBI has been taking measures to infuse liquidity into the system. “During the past few weeks, we have relaxed the statutory liquidity ratio limits, did some open market operations and restructured the buyback and auctions of government bonds, to handle short-term liquidity problems.”

The RBI’s policy statement on November 2 had tried to explain a comfortable liquidity band, which is plus or minus one per cent of the net demand and time liabilities (NDTL) but, “during the last couple of weeks the number has been clearly above that. That number was clearly about Rs. 50,000 crore”, Mr. Gokarn said.

Liquidity deficit is desirable from the monetary policy transmission point of view, he said, adding the economy had moved into a surplus liquidity mode after the injection of money in the post-slowdown monetary measures adopted by the Central bank and fiscal steps initiated by the government.

“An excessive liquidity deficit tends to bring about volatility in the short-term rates...that makes for some possible disruption for banking activities and credit flows,” the RBI Deputy Governor said.

Bankers have also been saying that liquidity has been tight in the system but this is the first time a senior Central bank official has flagged it as an issue of concern. For the past few weeks, the call money rates have been ruling at historic highs.

Mr. Gokarn, however, said, “the process of policy normalisation” is almost complete. There will not be further hikes in key rates in the immediate future, and “growth and inflation” will be the main factors while RBI firms up its responses.

In the last year alone, the RBI hiked its key rates six times in the process of getting things back to normal.

In January, it had brought back the mandatory cash reserves that banks had to part with the RBI by 1 per cent to 6 per cent — the pre-crisis level, and the short term lending and borrowing rates, or the repo and reverse repo, six times since then to 6.25 and 5.25 per cent respectively to batten down the high inflationary expectations, which still remains at an uncomfortable level of 8.62 per cent for September.

Though food inflation has been on a southward spiral for the past one month, it is still at an elevated level of 12.30 per cent for the week ended October 30. On inflation, Mr. Gokarn said it is still a mixed bag as food inflation has been waning.


RBI concerned over decline in industrial growthNovember 13, 2010

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