The Hindu : Business : RBI hints at stringent liquidity control measures

Online edition of India's National Newspaper
Friday, Dec 17, 2004

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RBI hints at stringent liquidity control measures

KOLKATA, DEC. 16 . The Reserve Bank of India today said the bank would use all its instruments to manage liquidity in the system following increased FII (foreign institutional investors) inflow.

"We will continue to use all the instruments that we are now using from time to time to manage liquidity,'' the bank Governor, Y. V. Reddy, told reporters after a meeting of the Central Board of the RBI here.

Commenting on the concerns expressed by the Union Finance Minister, P. Chidambaram, on liquidity management, the RBI Governor said, ``No. It is not right that he has raised concerns. I think he recognised the challenge and I believe that he is happy that we are managing the challenge responsibly.''

The fact remains that a strong FII inflow also involved to a certain extent a greater challenge or additional challenge to the liquidity management, he said.

He said liquidity unwinding was being planned earlier and now its amount might be more than what was anticipated.

"I think we have enough tools. We have got a range of tools apart from significant experience in managing liquidity and we are confident that we will be able to manage it with the type of capital flows that is happening,'' Dr. Reddy said.

Asked whether the inflation rate was a cause for concern, Dr. Reddy said, "The board reviewed the whole macro economic situation and felt that the GDP growth will certainly be in the range we had expected, that is, 6 to 6.5 per cent and growth of manufacturing industry in particular is a matter of great satisfaction.''

Commenting on oil prices and its impact on inflation, the Governor said, "While oil prices have come down, but again it is a bit of yo-yo kind of situation. Our own estimate is that while currently the inflation rate is short of 7 per cent plus, over a period it should slowly drop and we are hoping that the year will end at what we had expected in the monetary policy at around 6.5 per cent.'' Dr. Reddy said the monetary policy actions taken in the last few months had had the impact on the financial market and the credit market broadly on the way the bank had intended to be.

"The monetary policy stance that has been taken continues to be valid and we will stick to the measures already announced,'' he said.

To a question, Dr. Reddy said the Fed rate increase had been discounted in some way or already taken into account in the various financial markets.

"We also see the impact on the market has not been dramatic because it was anticipated and it has been absorbed in the way it should have been and in some extent in the line in which we had captured in the monetary policy, but we do continue to keep a watch,'' he said.

Dr. Reddy said the apex bank was in close touch with public sector banks in terms of giving its inputs on mergers and acquisitions (M&As).

The RBI, he said, felt that implementation of Basel-II norms by scheduled commercial banks was not something that calls for `precipitative' action.

Mergers and acquisitions

"Mergers and acquisitions are the process that have to take place on the basis of validity of dynamics that will come from bank boards,'' Dr. Reddy said.

"On our (RBI) part, we are in close touch with banks in terms of giving our inputs for the mergers and acquisition in the industry,'' he said.

The RBI Governor said M&As were a process and the Union Finance Minister, P. Chidambaram, had indicated the overall policy for the banking sector reforms. — PTI

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