Letters: The liquidity problem

Last Updated: Mon, Feb 18, 2013 20:55 hrs

The government is building up its cash balances with the Reserve Bank of India (RBI). As on February 8, they amounted to Rs 39,100 crore  having gone up by Rs 16,700 crore over the week. However, it does not tell the whole story. At the post-policy press conference on January 29, the RBI governor indicated that the central bank had sought the governments concurrence for revealing the full picture. The estimated decline in the gross domestic product growth rate from 5.5 per cent to five per cent has made the fiscal deficit target difficult to achieve. Hence, there will be a further curb on expenditure in March through the deferment of the payment of bills, tax refunds, and so on. The stress on the money market caused by the absorption of liquidity in the first fortnight of March owing to advance tax payments will be aggravated by the estimated Rs 1 lakh crore of certificates of deposit maturing for redemption in March. The government should consider auctioning its deposits and hence, returning them to the banking system, or allowing a float in the remittance of tax payments. Banks may be allowed to have a float for a limited period, say, from March 8 till April 5, on the payment of interest at the repo rate. The proposal will avoid time and effort involved in auctioning and the rollover of repos. The latter injects primary liquidity into the system.


A Seshan Mumbai


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