Ample liquidity in the system: RBI Dy Guv



Chakrabarty’s statement comes amidst a clamour for steps from RBI to ease liquidity in the system as its tight monetary policy has dried up private investment



Reserve Bank Deputy Governor K C Chakrabarty said there is sufficient liquidity in the system, though banks have been borrowing nearly Rs 1 trillion from the central bank's short- term borrowing window everyday for quite sometime now. Answering a question whether there is a possibility of RBI cutting the CRR to ease liquidity crunch, he said, " I am also reading it in the press. The RBI can use any tool at any time." To another question on whether a cut in the cash reserve ratio or CRR which is the interest- free cash that banks park with the central bank as a measure of their solvency, will be an appropriate measure in the prevailing high inflationary environment, he said, " appropriate steps will be taken to infuse liquidity at the appropriate time." The last time the RBI tweaked the CRR was in May 2010 and since then it has been pegged at 6 percent. Banks are mandated to park 6 percent of their assets as reserves with the central bank. However, the policy rate or short- term borrowing rate, has been raised 11 times during the same period or 325 basis points with the last being in the October policy when the repo rate was upped by 25 bps to 8.50 percent. The statement comes amidst a clamour for some urgent measures from RBI to ease liquidity pressure in the system as its tight monetary policy to fight a wayward inflation, which stood at 9.73 percent in October, has dried up private investment and brought growth to a two- year low. The second quarter GDP came down to 6.9 percent, a two- year low-- against 7.7 percent in the first quarter. Banks have been lapping up nearly Rs 1 trillion every day from the liquidity adjustment facility ( LAF), which is the shortterm borrowing window of the RBI. The massive fall of the rupee has only worsened the liquidity situation. Since August the rupee lost as much as 17 percent the greenback, making it the worst performer among its Asian peers, as there is a scramble for the safety of the US currency across the globe. Also, liquidity tightness will only increase in the days to come as corporates will be making advance tax payments by December 15. The statement also comes amidst demand from economists and analysts that given the sticky inflation, which has been sniffing at 10 percent for the past 13 months, it would be inappropriate for RBI to ease interest rates now, but a cut in CRR will send the right signal to the industry and markets. A 25 basis points slash in the CRR can release about Rs 15,000 crore into the system.  

FPJ