A fortnight ahead of the annual credit and monetary policy slated for April 17, Reserve Bank Governor D. Subbarao on Tuesday had a meeting with Finance Minister Pranab Mukherjee for discussions on the state of the economy and the current liquidity situation.
Speaking to the media after the meeting, Dr. Subbarao said: “Today's meeting was a routine administrative one. Next week I will come back and brief the Finance Minister on the macro-economic policy before the monetary review on April 17.”
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Even as the RBI chief described his meeting with the Finance Minister at the start of the new fiscal year as ‘routine', it assumes significance as it has come at a time when the apex bank has been proactive in addressing the liquidity crunch.
Besides, just a day earlier, the government unveiled its market borrowings programme which has been designed in such a way as to ensure that the private sector is not crowded out.
As per the mop-up schedule, the government plans to borrow Rs.3.79 lakh crore in the first half of 2012-13, which works out to over 65 per cent of the total Rs.5.13 lakh crore budgeted for raising through market borrowings during the entire fiscal year. Of this, a total of Rs.1.87 lakh crore is to be raised through auctioning of Treasury Bills (T-Bills) in the first quarter (April-June) itself.
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Government borrowing
The indicative calendar issued by the RBI shows that the government would be borrowing Rs.15,000 crore each week, on an average, during the first half of fiscal.
In the current uncertain economic environment marked by a tight liquidity situation even as interest rates as well as inflation continue to remain at high levels, all eyes are on the RBI on whether it will ease its key policy rate to induce investment demand and spur growth.
While the apex bank had raised the policy rates over a dozen times during the March 2010-October 2011 in its bid to contain the inflationary spiral, it did not tweak the repo (short-term lending) rate during the last three mid-quarter policy reviews. The expectation is that the RBI will do so now, but inflation still remains a cause for concern.
Meanwhile, voicing India Inc.'s long-standing demand for a cut in interest rates as costly credit has been adversely impacting economic activity, Assocham President Rajkumar Dhoot also urged the RBI chief to cut the repo rate by at least 50 basis points from the current 8.5 per cent to reduce the cost of borrowing and reduce the CRR (cash reserve ratio) by 75 basis points to augment the liquidity position.
“The economy is going through a difficult patch and business confidence has plummeted. New investments have slowed down …The RBI's monetary tightening has added to the low business confidence and affected financial bottomlines, leading to deceleration in investments …There is a need to cut it [CRR] further by 75 basis points … repo rates too, should be reduced by 50 basis points to squeeze cost of borrowings, encourage investments and boost growth,” Mr. Dhoot said during his interaction with the RBI Governor.