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| Managing inflation, liquidity deficit and growth are priorities |
| BS Reporter / Mumbai Jan 25, 2012, 00:19 IST |
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With the backdrop of economic slowdown, moderation in inflation and very tight liquidity, the Reserve Bank of India (RBI) said it would work to maintain an interest rate environment that helped contain inflation and related expectations, and the risks to growth.
Also, top on the agenda would be to manage liquidity, to ensure it remains in only moderate deficit, to ensure effective monetary transmission.
In its third-quarter review of annual policy for 2011-12, RBI said it would take swift action to manage the increasing downside risks to growth. The uncertain global environment, domestic policy uncertainties and tight monetary policy have slowed economic growth in 2011-12. Credit growth has also been below the projected trajectory, RBI said.
Inflation is moderating, largely due to a sharp deceleration in prices of seasonal food items. But it remains high for protein-based food items and non-food manufactured products.
Moreover, global crude oil prices, the lingering effect of rupee depreciation and slippage in fiscal deficit pose upside risks to inflation.
It said liquidity conditions have remained tight, beyond the comfort zone. This is despite infusion of Rs 70,000 crore in the system through government bond purchases. This could hurt credit flow to productive sectors of the economy. The large structural deficit in the system presents a strong case for injecting permanent primary liquidity into the system.
The liquidity conditions have been in deficit for most of 2011-12. They tightened further in November 2011, as RBI pumped dollars into the system to stem volatility in the foreign exchange market and advance tax outflows.
The pressure made banks increase use of RBI’s Liquidity Adjustment Facility. The average daily borrowings rose from around Rs 48,000 crore in April-September to around Rs 92,000 crore in November. This month, it went up further, to Rs 1,20,000 crore, RBI added.
Many banks, facing a severe asset-liability mismatch, used the Marginal Standing Facility (MSF). They could draw money up to one per cent of their net demand and time liabilities from their prescribed Statutory Liquidity Ratio (SLR) portfolio.
On December 21, RBI had said banks could access the MSF even if they had excess SLR holdings.
The sharp rise in government borrowings to fund the spurt in subsidies and expenditure put additional burden on liquidity. Beyond the budgeted borrowing estimate of Rs 4,17,000 crore, the central government announced an increase in borrowings through dated securities of about Rs 53,000 crore in September and a further Rs 40,000 crore in December.
Consequently, the revised figure of gross borrowing is expected to touch about Rs 5,10,000 crore.
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