The Hindu : Business : RBI to ensure adequate liquidity in the system

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Tuesday, Nov 18, 2008
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RBI to ensure adequate liquidity in the system

Special Correspondent

Bankers, industry pitching for further cut in lending rates

Citigroup anticipates further cut in policy rates
Removal of cap on overseas borrowings sought

NEW DELHI: The Reserve Bank of India Deputy Governor, Rakesh Mohan, on Monday maintained that the central bank is committed to its prime task of providing adequate liquidity in the country’s monetary system so as to ensure a smooth flow of credit to various sectors of the economy.

Interacting with newspersons on the sidelines of a conference here, Dr. Mohan said: “Given the kind of problems taking place in [the] global economy because of problems in other financial markets, we are very conscious of that [of the need to provide liquidity]… Basically, as the measures announced on Saturday show that given the international situation and [the] situation here, [the] RBI is committed to providing adequate liquidity in all the markets.”

Dr. Mohan pointed out that from September 16 till date, the RBI had been consistently taking measures to ensure that adequate liquidity was made available in the system and the country’s financial market worked efficiently by way of smooth of credit to all sections of the economy. “Since September 16, full series of measures has been designed to make sure that there is adequate liquidity in all the markets and credit flows continue,” he said.

Following the filing of bankruptcy by investment banker Lehman Brothers in mid-September, the RBI has been taking a number of steps to inject liquidity in the country’s cash-strapped system. Taking measures in phases, it has reduced its key rates such as the CRR and SLR as well as the short-term lending (repo) rate to infuse additional credit flow of about Rs. 2,70,000 crore.

As part of the ongoing exercise, the apex bank also announced further steps on Saturday last week which included a hike in the cap on NRI (non-resident Indian) deposits, scaling down the provisioning requirements for some sectors and hiking the time limit for availing of low-cost export (pre-shipment) credit.

Cooling inflation

However, with the global financial crisis unlikely to blow over any time soon, bankers as well as industry have been pitching for more steps by the RBI to signal a further cut in lending rates, especially when the inflation rate is in a cooling phase and had dropped to single digit.

Financial services major Citigroup, for instance, is anticipating a further cut in policy rates by the RBI while Deutsche Bank on Monday pitched for the same along with relaxation in overseas borrowing norms for infusion of more liquidity.

“We need more liquidity, more CRR cut, more repo rate and SLR cut...[the] RBI needs to go through [a] second phase of rate cut,” the bank’s CEO Gunit Chadha said.

The Deutsche Bank chief also argued in favour of removal of the interest cap on overseas borrowings which would help infrastructure companies to raise long term funds. Besides, he suggested that credit rating could be made mandatory for firms seeking to raise funds through the ECB (external commercial borrowing) route. Similar views were expressed at the India economic summit on Sunday when ICICI Bank CEO and CII President K.V. Kamath had pitched for more measures by the RBI to bring down interest rates by about 200-300 basis points.

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