In the wake of banks facing a cash crunch, Reserve Bank of India (RBI) governor Duvvuri Subbarao on Thursday announced that it would come to the rescue of the banking system when needed, but is yet to act.
"We are studying the issue, we will take some measures as may be necessary," Subbarao said, but did not disclose when the measures will be initiated.
Subbarao said that the cash crunch was due to two reasons - structural issue such as faster loan growth compared with the growth in deposits, and frictional factor caused by a build- up in government cash balances.
The Centre, which has seen funds raised through the 3G auctions and higher tax collections coming into its coffers since June 2010, is sitting on a cash pile of Rs 91,000 crore as of Wednesday, according to the RBI. "We were expecting that government cash balances will come down, that the government will spend, and that would ease the liquidity situation," the RBI governor said, adding " The government has started spending, but that is not large enough to ease the liquidity situation." Usually, the funds that enter the government coffers take 15- 20 days to come into the banking system as it spends that money on various projects. This time it failed to spend the funds, may be due to its pre- occupation with various scams, such as telecom and home loan scam.
Banks' overnight borrowings through the repo window of the RBI had been hovering well above Rs 1 lakh crore during the last couple of weeks. Most of this pressure on the banking system has come when depositors withdrew their funds during the festive season that began in September.
"The statement has reaffirmed RBI's commitment to provide enough liquidity again.
No new initiative was announced today. It has not made much of a difference for the money markets," said Moses Harding, executive vicepresident of IndusInd Bank.
In the government securities market, yields have eased by 0.03 per cent (or three basis points) to 8.12 per cent after the announcement made in Kolkata, where the RBI's board met. This represents the comfort level the banks have taken from it. One year call money rates however, continued to hover above the nine per cent level.
RBI has earlier announced that it would buy back Rs 12,000 crore worth of government securities (G- Sec) as a measure of infusing funds into the country's banking system, besides cutting the size of the G- Sec auction scheduled for Friday. Before these measures were announced the 10- year benchmark bond was hovering at 8.22 per cent yield (the rate which the best investments in the country could command).
The governor also said that the RBI would finalise its guidelines on the new banking licences by next month- end, adding that public opinion was divided over whether to allow corporate houses to set up banks and whether non- banking finance companies (NBFC) be allowed to turn into banks.
Subir Gokarn, deputy governor of the RBI, said that inflation management would be a major challenge in the wake of reversal in falling food prices in the latest figures. He also flagged rising oil prices as a major concern.
Food price inflation rose to 8.69 per cent for the week ended November 27, slightly above 8.6 per cent in the previous week. However, oil price inflation remained at the previous week's level of 9.99 per cent.
The wholesale price index measured on a monthly basis is at 8.58 per cent for October 2010, down from 8.62 per cent.
Courtesy: Mail Today
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