The Reserve Bank of India (RBI), on Saturday, said it was taking measures to ease the liquidity crunch in the economy — currently estimated at around Rs 50,000 crore — that has worsened recently.

Further, RBI Deputy Governor Subir Gokarn said RBI’s policy statement on November 2 had tried to explain a comfortable liquidity band, which is plus or minus one per cent of the net demand and time liabilities (NDTL). 

However, Gokarn continued: “During the last couple of weeks the number(meaning:deficit) has been clearly above that.  That number was clearly around Rs 50,000 crore.” He was delivering a key note address at — The CFO Summit 2010 — organised by the Confederation of Indian Industry (CII), which is also supported by other industry bodies like ICSI and ICWAI, along with PricewaterhouseCoopers (PwC), as Knowledge Partner.

Festive demand

Furthermore, Gokarn pointed out that the economy has been experiencing liquidity shortfall due to a spurt in festive demand coupled with an over Rs 20,000 crore absorption on account of the recent share sale offer of public sector undertaking Coal India and Power Grid Corporation (PGCIL). In the above context, he said “We moved to a deficit liquidity situation in end May or early June. But in the last few weeks it has gone beyond what we think is a normal or a positive liquidity deficit.” According to him, even as some deficit in liquidity is desirable, still “in the last few weeks the liquidity situation has gone beyond the comfort zone.”

It may be recalled here that RBI earlier this week took some special measures aimed at easing the pressure on liquidity which enabled banks be able to avail more funds under the liquidity adjustment facility (LAF) for up to one per cent more on their deposits.

Gokarn pointed out that since the past few weeks, the apex bank has been taking measures to infuse liquidity into the system.  “During the past few weeks, we have relaxed the statutory liquidity ratio limits, did some open market operations and restructured the buyback and auctions of government bonds, to handle short-term liquidity problems,” said he. According to him, liquidity deficit is desirable from the monetary policy transmission point of view, especially when the economy had earlier moved into a surplus liquidity mode. This, Gokarn added, had been after the injection of money in the post-slowdown monetary measures adopted by the central bank and fiscal steps initiated by the government.

“An excessive liquidity deficit tends to bring about volatility in the short-term rates...which makes for some possible disruption for banking activities and credit flows,” RBI Deputy Governor said.

Historic highs

All along, bankers have been saying that liquidity has been tight in the system but it is for the first time that a top RBI dignitary has not only admitted it and also flagged it as an issue of concern. For the past few weeks, the call money rates have been ruling at historic highs.

However, Gokarn still maintained that “the process of policy normalisation” is almost complete,” suggesting that there will not be further hikes in key rates in the immediate future. He said, “growth and inflation” will be the main factors while RBI firms up its responses. It may be recalled that though food inflation has been on a southward spiral for the past one month, it is still at an elevated level of 12.30 per cent for the week ended October 30. In this context, Gokarn maintained that it is still a mixed bag as food inflation has been waning.

As far as the sharp fall in factory output growth, Gokarn noted that the latest numbers are disconcerting but  he was quick to add that the other key indicators such as corporate earnings and tax collection numbers show that the recovery process is on track, though they may not be as explosive as it was some quarters back.

“The IIP (index of industrial production) is suggesting somewhat of a deceleration (in the growth process). 5.5 (per cent) in August and 4.4 per cent in September, a lot of that deceleration is coming in from a sharp decline in capital goods, which, of course, must raise some concerns.” said he. Whether this deceleration, he asked, reflects a slowdown in investment activities? Attempting to reply, he said:”If that is the case, is it reflecting the cost of funding or is that reflecting weaker expectations of future growth or a combination of the two? All of these is a matter of concern.”