Reserve Bank braces for heavy 3G cash outflows

Banks can borrow if they require repo facility, says the apex bank

Reserve Bank braces for heavy 3G cash outflows

The auction, that lasted 34 days, will generate $14.6 billion for the government, nearly double what it had earlier expected.

“I want to assure you that we are taking into account... we are monitoring the liquidity situation,” RBI Governor D Subbarao said after a central bank board meeting here.
Data released by RBI last Friday had showed the Centre had borrowed Rs 1,936.8 billion ($4.1 billion) from RBI via short-term overdraft facility in the week to May 7, down from Rs 2,886.8 billion in the previous week. Banks could borrow via RBI’s daily reverse repurchase auction window to tide over any difficulties because of cash outflows towards the 3G auctions, one of the deputy governors said. “RBI has assured the (banking) system that adequate liquidity will be maintained. If banks need repo facility they can borrow from the RBI,” said Deputy Governor Shyamala Gopinath.

“Banks do have excess SLR,” she said referring to the central bank’s statutory liquidity ratio, which requires banks to keep at least 25 per cent of their deposits in government securities. The banking system will also see outflows towards quarterly advance taxes by corporates in mid-June. Subbarao did not provide any details about specific steps that the central bank might adopt to manage liquidity. He also did not comment on whether government borrowing would be reduced because of the higher-than-expected 3G auction proceeds. Subbarao said the central bank had not yet fully exited from its accommodative monetary stance. “We have begun policy exit, we have to traverse down that line,” he said.

Impact on exports
Separately, Subbarao said the Greece crisis may have some impact on India’s trade and services exports, but will not likely affect capital flows.

“Europe accounts for about 27 per cent of India’s trade, so if Europe has a setback towards its recovery process... it will have an impact on our trade. More importantly, it might have an impact on services exports,” Subbarao said. “We do not see much of an impact in base case scenario on financial flows and overall sentiment. If there is turbulence in international markets, there will be some knock-on impact here, but that I think will be transient and marginal.” He said the European debt crisis is not expected to impact big on India, yet RBI was keeping a watch.  “From the present scenario we do not foresee that there would be a big impact on us, but we are keeping a close watch,” he said adding RBI is closely studying the crisis. On making rupee fully convertible in the present domestic and international economic scenario, Subbarao said, “For that we have to traverse a long way”.

* Licence fee payment for 3G spectrum will be Rs 67,719 crore
* Much of it will come from bank borrowings
* RBI is keeping a close watch on liquidity situation
* Europe acccounts for 27 per cent of India’s foreign trade
* A set back in Europe recovery is a matter of concern for India.

Islamic banking needs new law
The legal system in the country does not permit banking institutions based on Islam or Islamic principles to operate and a separate legislation would be needed for the purpose, RBI Governor D Subbarao said, reports DHNS from Thiruvanthapuram. 
 Hesaid Islamic banking system worked on the principle of sharing of profit and loss. “Deposits are RBI’s concern and bank’s job is to protect the depositor. Sharing of losses and profits is against the interest of the depositor. The absence of interest rate is also inconsistent with the banking system,’’ he said. According to him, Islamic banks by definition could not hold on to SLR. Hence, they could not function under the existing regulations.

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