Credit Policy Review: RBI steps in to check liquidity deficit:
India’s central bank on Thursday released mid-quarterly review of monetary policy. As expected, the Reserve Bank of India (RBI) has left the key rates untouched.
It was unexpected as the ongoing liquidity deficit had made it very difficult for the RBI to tinker with rates even is the faster-than-expected growth had opened some extra room for policy tightening.
Key part of the policy review was aimed at addressing the concerns of liquidity deficit. In an important measure in this context, the central bank has cut the statutory liquidity ratio (SLR) by 1% to 24%. It should be noted that this measure is very different from already prevalent 2% extra support of the SLR. In the earlier measure, banks could only use 2% of SLR securities for getting liquidity support while now they will have to maintain 1% less SLR. The measure will infuse a liquidity of around Rs 25,000 crore into the system.
Another measure that the central bank announced on liquidity front is that it would conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of Rs 48,000 crore over the next one month. The schedule for the OMOs will be issued separately. Together, both these measures will help ease the liquidity deficit to some extent which otherwise has remained close to Rs 1 lakh crore for more than a month.
The central bank accepted that while the liquidity deficit was consistent with the policy stance, the extent of tightness has been beyond its comfort level. Part of the reason for tightness was persistence of large government cash balances which has averaged Rs 84,000 crore since the Second Quarter Review of November, that works out to be close to the average net LAF repo amount of Rs 1,01,000 crore.
However, the central bank also attributed the deficit to some structural factors such as significantly above-trend currency expansion and relatively sluggish growth in bank deposits even as the credit growth accelerated in 2010-11. While the liquidity deficit improved transmission of monetary policy signals with several banks raising deposit and lending interest rates, excessive deficits induce unpredictability in both availability and cost of funds, making it difficult for the banking system to sustain credit delivery. The RBI comments hint that banks will have to work for raising the deposit growth rate in order to find a sustainable solution to the liquidity problem.
On the domestic economy front however the central bank sounded rather confident. In view of higher-than-expected GDP growth of 8.9% in Q2 of 2010-11 and strong performance of all the sectors, the RBI was confident of economy maintaining strong growth momentum. It noted that the index of industrial production (IIP) was recovering while various other indicators of manufacturing activity, including the Purchasing Managers’ Index (PMI) also suggested a strong underlying momentum. Lead indicators of services sector activity have also continued to increase at a robust pace. Despite the very positive assessment though, the RBI left the growth projection at 8.5% for real GDP growth and said it will review the same in the Third Quarter Review scheduled on January 25, 2011.
India’s central bank on Thursday released mid-quarterly review of monetary policy. As expected, the Reserve Bank of India (RBI) has left the key rates untouched.
It was unexpected as the ongoing liquidity deficit had made it very difficult for the RBI to tinker with rates even is the faster-than-expected growth had opened some extra room for policy tightening.
Key part of the policy review was aimed at addressing the concerns of liquidity deficit. In an important measure in this context, the central bank has cut the statutory liquidity ratio (SLR) by 1% to 24%. It should be noted that this measure is very different from already prevalent 2% extra support of the SLR. In the earlier measure, banks could only use 2% of SLR securities for getting liquidity support while now they will have to maintain 1% less SLR. The measure will infuse a liquidity of around Rs 25,000 crore into the system.
Another measure that the central bank announced on liquidity front is that it would conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of Rs 48,000 crore over the next one month. The schedule for the OMOs will be issued separately. Together, both these measures will help ease the liquidity deficit to some extent which otherwise has remained close to Rs 1 lakh crore for more than a month.
The central bank accepted that while the liquidity deficit was consistent with the policy stance, the extent of tightness has been beyond its comfort level. Part of the reason for tightness was persistence of large government cash balances which has averaged Rs 84,000 crore since the Second Quarter Review of November, that works out to be close to the average net LAF repo amount of Rs 1,01,000 crore.
However, the central bank also attributed the deficit to some structural factors such as significantly above-trend currency expansion and relatively sluggish growth in bank deposits even as the credit growth accelerated in 2010-11. While the liquidity deficit improved transmission of monetary policy signals with several banks raising deposit and lending interest rates, excessive deficits induce unpredictability in both availability and cost of funds, making it difficult for the banking system to sustain credit delivery. The RBI comments hint that banks will have to work for raising the deposit growth rate in order to find a sustainable solution to the liquidity problem.
On the domestic economy front however the central bank sounded rather confident. In view of higher-than-expected GDP growth of 8.9% in Q2 of 2010-11 and strong performance of all the sectors, the RBI was confident of economy maintaining strong growth momentum. It noted that the index of industrial production (IIP) was recovering while various other indicators of manufacturing activity, including the Purchasing Managers’ Index (PMI) also suggested a strong underlying momentum. Lead indicators of services sector activity have also continued to increase at a robust pace. Despite the very positive assessment though, the RBI left the growth projection at 8.5% for real GDP growth and said it will review the same in the Third Quarter Review scheduled on January 25, 2011.
No comments:
Post a Comment