RBI to take all steps to ensure liquidity

The Reserve Bank of India (RBI) will take all steps needed to ensure there is adequate liquidity in the banking system, its chief said on Thursday, even as he declined comment on the possibility of lowering the cash reserve ratio to ease tight cash conditions. "There is liquidity constraint across the system or certainly for certain banks," Duvvuri Subbarao told reporters after a central bank board meeting in Kolkata. "So as necessary, we will take appropriate measures to see that the liquidity situation is eased," he said. The cash crunch, currently hovering around 1 trillion rupees, is above the RBI's comfort zone of 1 percent of the total deposits in the banking system, which roughly translates to 600 billion rupees at current levels. The RBI has bought back 243 billion rupees of bonds out of a targeted 300 billion rupees via three buybacks through open market operations to ease liquidity. However, bond dealers are hoping the RBI will use the cash reserve ratio, or the proportion of deposits that banks need to set aside with the central bank as cash, as a more potent tool to bring in liquidity. The ratio now stands at 6 percent. Subir Gokarn, a deputy RBI governor, had said on Wednesday the cash reserve ratio was not just a liquidity tool but a monetary policy signal. He said bond buybacks would be the route going ahead for easing liquidity. The RBI has a tough balancing job in ensuring enough liquidity for the banking system in a way it does not fuel inflation, which still remains high. India's headline inflation stood at 9.73 percent in October, above the RBI's comfort zone of 7 percent by March, 2012. "Some amount of rupee depreciation, some assessment of oil price has been spelt into our projection of WPI inflation...," Subbarao said, when asked whether the central bank will raise its inflation projection at its December 16 monetary policy review. The sharp fall in the rupee has been largely due to global factors, particularly the developments in Europe, the central bank chief said. "Because there has been no inflows coming in a significant way, the rupee exchange rate has been determined by current account deficit," he said. The rupee, weighed by a surging oil import bill and widening trade deficit, had touched a record low of 52.73 versus the dollar on November 22 and is the worst performing currency among Asian peers so far this year. It has fallen 13.6 percent so far in 2011. Subbarao declined comment on whether the RBI has intervened in the foreign exchange markets in past weeks, though forex dealers have suspected the central bank's hand in a bid to stem the rupee's slide. Official intervention data from the central bank comes with a two-month lag.It had intervened in the market in September, after following a hands-off approach for nine straight months, its monthly bulletin showed last month. "In order to determine whether we should intervene or not, our guide is our policy which is we intervene in the market to manage volatility and to manage any incipient macro-economic instability," he said.  
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