RBI to infuse Rs48,000 crore, blames government surplus for cash crunch

With the system facing cash crunch due to outgo on account of advance tax payments and busy credit season, the Reserve Bank of India (RBI) on Thursday announced measures to pump in Rs48,000 crore even as it cautioned against inflation.

It said prices still remained a major concern because of rising demand and high global commodity rates.

At the same time, the Reserve Bank kept short-term lending and borrowing rates (repo and reverse repo) as well as mandatory deposit requirement for banks (cash reserve ratio) unchanged.

This is aimed at prompting  most banks to hold on to their interest rates.

Meanwhile, the market took the announcements with a pinch of salt with the Bombay Stock Exchange's benchmark index Sensex trading lower by over 50 points at 19,594.83 during intra-day trading.

Besides, the rate sensitive sectors like banking, realty were mixed with Bankex trading 0.47% higher and Realty index at 0.03% down.

The RBI measures came on a day when food inflation rose to 9.46% for the week ended December four from 8.60% a week ago, and the central bank also did not rule out the possibility of the rate of overall price rise going above its projections of 5.5% by March-end.

Hike in petrol prices is also expected to add to inflationary pressures.

However, overall inflation has been declining persistently and stood at 7.48% in November.

Enthused by 8.9% growth rate for the second quarter, RBI, however, did not change its projections of 8.5% economic growth this fiscal and preferred to revisit numbers at its next review on January 25, 2011.

Blaming the government's huge cash balance for aggravating liquidity situation, the central bank said it will purchase sovereign securities for Rs48,000 crore in a month, expected to ease situation of cash-strapped system a bit.

It also cut Statutory Liquidity Ratio (SLR), which is a requirement for banks to keep portion of their deposits in government securities, cash and gold, by one percentage point to 24% from the present 25%.

However, the measure is unlikely to provide any immediate relief to the system, as RBI has already announced that it will not penalise the banks even if their SLR comes down two percentage points below the mandatory requirement.

That facility now stands cut to one percentage points, RBI said today.

The RBI cautioned that its moves should not be seen as a change in the policy stance, since "inflation continues to remain a major concern."

However, technically RBI's move is a first measure stance this year of a pause on its rising rates spree.

The central bank said while it expected liquidity to remain in short supply, "the extent of tightness has been beyond the comfort level of the Reserve Bank."

"This has been mainly due to persistence of large government cash balances which have averaged Rs84,000 crore since the Second Quarter Review of November," it said.

The government got over Rs one lakh crore from the sale of spectrum to high speed telecom and broadband services against its projections of Rs35,000 crore in the Budget.

It is also expected to get robust tax collections from corporates in advance payments for third quarter.

Bankers said RBI actions would enable most banks to not further raise their interest rates.

Oriental Bank of Commerce executive director SC Sinha said,"RBI actions would put on hold deposit rate hike for some time and lending rate hike.

The rate hike would come from those banks which have not done in the last one month," he said.

Major banks like ICICI Bank, HDFC Bank, PNB had raised their interest rates, while the country's largest lender, SBI had hiked only deposit rates.

Chief economic advisor Kaushik Basu said,"There had been concern about liquidity situation. They (RBI) had to do a bit of fine balancing act between the easing liquidity situation and the same time making sure that there isn't greater pressure on interest rates."

The extent of liquidity strain could be gauged from the fact that banks borrow net over Rs1 lakh crore on an average daily from RBI through its repo window.

The Reserve Bank had also announced recently two rounds of purchase of government securities for Rs 12,000 crore each through open market operations (OMO).

Today's move to inject Rs48,000 crore will also come through OMO, by which RBI manages liquidity through purchase and sale of government securities.

Even as RBI cautioned that "risk to projection of 5.5% inflation by March 2011 is on the upside,", the finance ministry down played concerns on inflation.

"They (RBI) have taken a call on the fact that inflation has moderated and the basic problem today, though temporary, is liquidity deficit", finance secretary Ashok Chawla said.

"So, they have responded to that which will make Rs48,000 crore available in terms of injection. That is important, very crucial, so that credit delivery is not impacted," Chawla said.

The Reserve Bank, however, said though inflation has moderated, inflationary pressures persist both from domestic demand and higher commodity prices.

"The pace of decline in food price inflation has been slower than expected due largely to structural factors. There is a risk that rising international commodity prices will spill over into domestic inflation," the central bank said.

Global oil prices are ruling at 88.55 dollars a barrel, despite moderation. Freezing winters in Europe will also add further pressure on oil prices.

In India, petrol prices were recently hiked by close to Rs3 a litre.

RBI also said, "Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation."

Industry, which was critical of RBI's earlier actions of raising policy rates, said it is "extremely delighted" with the central bank's action to halt hike in key rates and address the liquidity problem.