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Govt spending not enough, says Subbarao

December 10, 2010 13:08 IST

Reserve Bank of India (RBI) Governor D Subbarao on Thursday said while the central bank was deeply conscious of the continuing liquidity crunch, the scale of government spending was not enough to ease the situation.

RBI was studying the matter and would take steps when required, he told reporters after the central bank's board meeting here on Thursday.

"We were expecting the government cash balance to come down with spending, which would, in turn, have eased liquidity. The government has started spending, but not on a scale which would ease liquidity," said Subbarao.

In view of the crunch, RBI has provided banks a leeway of two per cent in the statutory liquidity ratio (SLR) and has infused funds in the market by buying back government bonds through open market operations.

The liquidity scenario may worsen due to advance tax payments by companies during the middle of the month, estimated to be Rs 50,000-60,000 crore. The deadline for paying advance tax is December 15.

As on Wednesday, the government cash balance stood at Rs 91,000-92,000 crore, said Subbarao.

"The structural factor (for liquidity squeeze) is that credit expansion has been faster than deposit growth. The situation is improving, but has not improved substantially to ease liquidity. The frictional factor is build-up in the government cash balance, which is higher than anticipated," Subbarao said.

The higher government cash balance is on account of disinvestment proceeds, gains from the 3G spectrum auction and higher-than-expected indirect tax collections.

"We would like the liquidity adjustment facility (LAF) window to be plus/minus one per cent of the net demand and time liabilities (NDTL), which translates into Rs 50,000 crore.

The outflow of funds from LAF in the last 45 days has been much higher. Yesterday, it was Rs 127,000 crore," he said.

Recently, RBI allowed banks to avail of additional funds up to two per cent of the net NDTL, or deposits, under LAF till January 28. Thus, they can maintain a lower SLR of 23 per cent instead of 25 per cent of deposits.

However, higher borrowing from LAF was not on account of any de-stabilising factor in the market but liquidity crunch, he said.

"The demand at LAF auctions has been higher. However, one comforting factor is that the money market has been close to it.

There is no disruptive momentum like in the crisis period. That is due to liquidity shortage and not de-stabilising factors in the market," said Subbarao.

To ease liquidity, RBI had announced cutting the size of the government auction to Rs 6,000 crore from Rs 11,000 crore, apart from open market operations.

 

BS Reporter in Kolkata