Govt reducing cash balance with RBI: Deputy Gov
The government has started drawing down its huge cash balance with the Reserve Bank of India (RBI), a move which will help ease liquidity in the banking system, a deputy governor at the RBI said on Monday.
February 07, 2011 / 20:02 IST
The government has started drawing down its huge cash balance with the Reserve Bank of India (RBI), a move which will help ease liquidity in the banking system, a deputy governor at the RBI said on Monday.
The government was unable to accelerate its pace of scheduled spending for most of the second half of 2010. That, coupled with the RBI's aim to keep liquidity in deficit mode because of high inflation resulted in a prolonged tight cash conditions."Drawing down of the balances is clearly easing the liquidity situation," said Subir Gokarn, Deputy Governor at India's central bank, the Reserve Bank of India."For the moment, it appears that the reduction in government balances is clearly helping to bring the LAF (liquidity adjustment facility) operations into our zone of comfort," he said on the sidelines of a conference.The LAF is the window through which banks park money with RBI when they are in surplus and borrow during a cash crunch.The government is scheduled to spend Rs 4 lakh crore (USD 88.1 billion) in the March quarter, of which around Rs 3 lakh crore is still to be spent, analysts say.Much of this spending will be financed by the cash balance with the RBI of about Rs 70,000 crore, while the rest could be funded by another trillion rupees in expected revenues.Banks borrowed on average around Rs 85,000 crore rupees daily from the RBI repo window from November through January, which has come off to around Rs 73,000 crore this month, indicating easing liquidity in the markets.However, Gokarn said growth in bank deposits will also play an important role in easing the liquidity situation, in addition to accelerated spending by the government.He emphasised that India's monetary policy stance continues to anti-inflationary, as headline inflation at 8.43% continues to be high, with the risk of an upside to oil prices resulting from the unrest in Egypt.For now the RBI is sticking to its end-March headline inflation forecast of 7%, Gokarn said.High commodity and crude prices pose inflationary risks for India, with persistently high food inflation that is currently at over 15%.Prolonged political turmoil in Middle Eastern countries, led by Egypt, may further deteriorate India's current account deficit and dent investment flows to emerging markets, Citigroup said in a note on Monday.Higher crude prices could inflate India's already high fuel subsidy burden and stoke higher inflation.India's current account deficit in the September quarter widened to a record high of USD 15.8 billion as booming domestic consumer demand sucked in imports and service sector exports suffered from weak global demand. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
