Liquidity tightness only temporary, says Mohan

The Reserve Bank of India Deputy Governor Rakesh Mohan on Thursday said the cash tightness in the banking system was temporary. "Because of December tax outflows and impact of the increased cash reserve ratio, there is temporary tightness in liquidity," he said.

Mohan said he expected the overall liquidity by the end of March to be the same as the year before. "After tax outflows it takes time for expenditure to take place. I don't see much change in liquidity," he said.

The deputy governor said he expected cash in circulation in the banking system to remain in the range of Rs 80,000-1,00,000 crore (Rs 800-1,000 billion) by the end of this financial year.

Cash circulation in the system had shrunk significantly over the past two weeks on the back of estimated outflows toward quarterly payments of corporate taxes.

In early December, the central bank had announced an increase in the CRR to check inflationary pressures. It had proposed to raise the ratio to 5.50 per cent in two stages of 25-basis point hike on December 23 and January 6, 2007.

Mohan declined to comment on whether the reverse repo rate - the rate at which the banking regulator absorbs excess funds from the system - would also be increased. He, however, said the government had already taken measures to keep inflation within the central bank's estimated range.

Mohan said the RBI would take the required policy measures to keep inflation between 5 and 5.5 per cent till the end of the current financial year. "We said in our mid-term review we were keeping inflation to our expected levels of 5.0-5.5 per cent towards the end of the year. We also said certain policy measures would be required to do that. And we have done what we said," he said.

Mohan was speaking to reporters here after a meeting of the Central Board of RBI, which was attended by Governor Y V Reddy, economic affairs secretary Ashok Kumar Jha and deputy governor V Leeladhar, among others.

The board reviewed the key economic, monetary and financial developments in the meeting.