The Reserve Bank of India (RBI) should rely on a blend of monetary measures like increase in cash reserve ratio and introduction of ‘Unremunerated reserve requirement’ on capital inflows to immobilise the excess liquidity in the system, a top Economist said on Tuesday.

“It would be reasonable to expect that RBI would use a fine blend of measures rather than relying on a single instrument. The danger of using a single instrument is that it has to be used to such an extreme that it results in severe distortions,” S S Tarapore, former Deputy Governor of RBI, said at a seminar here.

Tarapore’s observation comes a few days ahead of the RBI’s mid-term policy, due on October 30. A hike in CRR is expected to immobilise about Rs 30,000 crore in the system. “As capital inflows continue to be large it would be  feasible to use the instrument of incremental CRR, say 10 per cent, which would immobilise about Rs 20,000 crore in the current fiscal,” he added. Under the instrument ‘Unremunerated reserve requirement,’ of all capital inflows, nearly 10 per cent would be deposited with RBI for a period of one year, which would in turn help to check excess liquidity in the market.

Hike in MSS
“Considering the recent hike in Market Stabilisation Schemes (MSS), under which bonds are issued to sterilise liquidity, it will not be expected that the government will further enhance the ceiling,” he added.
RBI had recently enhanced the ceiling of MSS bonds from Rs 1,50,000 crore to Rs 2,00,000 crore. “Unless the government comes with necessary macro-economic decisions in 2-3 months, the continuing capital inflows may lead to instability in the system,” Tarapore added.