‘There are uncertainties about liquidity in the system’

The Reserve Bank of India (RBI) has no plans to retire foreign currency forward contracts to meet the liquidity deficit in the financial system, and will instead consider bond purchases and other measures, Governor D. Subbarao said here on Thursday.

Dr. Subbarao has previously said that the central bank does not use forex intervention to manage liquidity as a matter of policy, but, on Thursday, he specifically ruled out redeeming the country’s outstanding foreign debt to bridge the cash deficit.

“There are uncertainties about liquidity in the system. We will try to manage that actively,’’ Dr. Subbarao told reporters after the RBI board meeting here.

“We do not use forex intervention as a measure of managing liquidity,’’ he then added.

His comments come as the country’s persistent tight liquidity deficit has worsened this week. Banks borrowed Rs.1.05 lakh crore ($19.40 billion) on Thursday from the central bank, the third consecutive day where repo borrowings have surpassed the Rs.1 lakh crore-mark.

Resolution authority

The RBI said a proposal was afoot to set up a resolution authority to deal with the widespread distress caused by failure of financial institutions.

“...within India we are coming up with a resolution authority for what can be done when institutions come under stress,” Dr. Subbarao said in response to a query as to whether it was right to impose ‘sin tax’ to bail out distressed investors of the Saradha group in West Bengal. Citing examples of developed nations, he said, it was done in the U.S. when the government used tax payer money to bail out many financial institutions which came under stress due to global meltdown in 2008.

The RBI, he said, would soon issue a public advisory to spread awareness among people about unscrupulous scheme operators.

“The RBI, as a public policy institution, is responsible for spreading awareness about what are the legal schemes and what is illegal, who is the responsible for regulating these schemes, how can ordinary people know what is legal and what is illegal and how can they protect themselves against frauds,” he added.

Stating that alleged financial fraud by the Saradha group recently should not be termed as chit fund scam, he said, “what has been blown up by media in the last few days some are collective investment schemes, which are registered with SEBI. There are irregularities, and SEBI is taking action.’’ Noting that the non-banking sector was very large and diverse segment, Dr. Subbarao said the sector was regulated by different entities.

“There are several types of institutions and schemes, operations in the non-bank sector. Different regulatory agencies are responsible for regulating such schemes in particular,” he said.

Deposit-taking NBFCs registered with the RBI were to be regulated by the RBI, he said. In case they were not registered with the central bank, they would come within the purview of the Ministry of Corporate Affairs, he pointed out.

Dr. Subbarao further said that “the collective investment schemes such as Saradha are within the purview of SEBI so there is got be a clear understanding in the media and through you in public of the diversity of the structure and the responsibilities of various regulators.”

More In: Economy | Business