India proposes more fiscal measures to infuse liquidity in system

October 11th, 2008 - 4:51 pm ICT by IANS  

New Delhi, Oct 11 (IANS) India is proposing more fiscal measures, including further cuts in cash reserve ratio (CRR) for banks and in the interest rates to tide over the current turmoil in the financial markets, well-placed sources in the finance ministry and the central bank said Saturday.“Fiscal steps will be most effective to diffuse the current crisis. These are potential line of defence against liquidity crunch when the meltdown is global,” said an official in the ministry of finance.

“Accordingly, there is a suggestion to cut the CRR (minimum balance against deposits a bank has to keep as cash) by another 50 basis points to seven percent. It will moderate the call money rate, which is otherwise so volatile,” the official said, requesting anonymity.

The call money rate soared to 24 percent Friday, which had otherwise been veering around five-seven percent. The call money rate is what the banks pay for borrowing from each other overnight. It is used to meet temporary shortages of funds.

“The repo rate reduction is another key line of defence, which we have not yet used,” a senior functionary in the Reserve Bank of India (RBI) said over phone from Mumbai, while confirming that a further cut in cash reserve ratio was also being debated.

The repo rate, or the repurchase rate, is the rate at which banks borrow funds from the central bank.

“The reduction in repo rate (currently at nine percent) will have a sobering effect on interest rates. Since CRR has already been cut, industry should then be able to borrow more at cheaper rates,” said the finance ministry official.

“So the question is by how much can the interest rate be cut? Inflation has started to moderate only now, and that aspect also cannot be ignored. At the same time industrial production growth has dipped to 1.3 percent. So wait till Monday.”

Officials at North Block also said that the newly constituted high-level committee under Finance Secretary Arun Ramanathan will hold a meeting Monday to look into the liquidity constraints and suggest what future course of action can be taken on the issue.

They said RBI Governor D. Subbarao, who is currently in Washington to attend the annual meeting of the International Monetary Fund (IMF) will also meet the panel members and Finance Minister P. Chidambaram to discuss the issues.

“The Reserve Bank of India has taken action to inject liquidity into the system as warranted by the situation,” Subbarao said in Washington. “We are monitoring the situation on a continuous basis, and stand ready to take appropriate effective and swift action.”

Officials said the central bank may also consider unwinding some of the bonds under the market stabilisation scheme - which is used to mop up excess liquidity from the system in a bids to tame inflation.

He said the decision not to sell Rs.100 billion ($2.2 billion) worth of bonds that were scheduled for auction Friday was enough indication that some securities under the market stabilisation scheme may be bought back.

“Yes, this is an option as well. We will monitor how the money markets behave in the ensuing weeks and take swift action,” said the central bank official, without sharing any specifics.

D.H. Pai Panandikar, a noted business economist and president of the RPG Foundation, an economic think-tank, said the government had limited financial options to exercise to tame the turmoil in the financial markets.

“CRR, repo rate and government securities are certainly three major fiscal ammunition to help thwart the current crisis. The question of tightening money supply now just does not arise, since inflation is stabilising,” Panandikar told IANS.

“At the same time, the government must replenish fast the farm loan waiver money to the banks. Since the money has to come from the budget, the matter should be expedited in view of the coming session of parliament,” said Panandikar.

Finance Secretary Ramanathan has said banks would get Rs. 250 billion during the ensuing session of parliament starting Oct 17 to help them shore up their coffers on account of loans worth Rs.710 billion to farmers that were subsequently written off.

Panandikar also said that foreign funds will continue to take money out of the Indian capital markets, having already made net sales worth $10 billion in the current year.

“So we cannot expect any major inflows from abroad. We have to grapple with the crisis on our own.”

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