RBI sees tightening of liquidition, asks banks to raise deposits

Mumbai, Mar 12 (UNI) Reserve Bank of India (RBI) has advised banks to raise their deposit growth in order to overcome the tightening liquidity conditions in the coming weeks.

''Going ahead, it is expected that banks will act to raise deposit growth... this will also be aided by lagged impact of credit flow on deposit growth,'' said RBI Governor Dr Y V Reddy.

In an interaction with mediapersons this weekend, the RBI Governor said, ''Transient factors affecting market liquidity such as advance tax flows can put some pressures in mid-March, which can be managed through the RBI refinance or the repo window.'' Also, he expected that the Government spending, specially by the States, will pick up in the coming months.

The repo volumes under Liquidity Adjustment Facility (LAF) have now declined to more neutral levels. In March 2006 so far, they have averaged Rs 6,645 crore compared to Rs 13,766 crore in February 2006.

He said, the liquidity conditions became tighter from mid-December 2005 due to Indian Millennium Deposits (IMD) redemptions of USD 7.1 billion, build-up of Government of India (GOI) cash balances and sustained credit growth. Liquidity impact of IMD redemptions was about Rs 32,000 crore.

The average GOI cash balances with RBI between December 2005 and February 2006 was higher by about Rs 18,000 crore as compared to January-November 2005.

The Credit-Deposit (CD) ratio of the banking system stood at a high of 71 per cent as on February 17, 2006. Also, the incremental credit-deposit ratio has been more than 100 per cent for two consecutive years, he said.

On management of liquidity, Dr Reddy said that since mid-December 2005, the injections through LAF and market stabilisation scheme(MSS) unwinding and market operations have far exceeded the IMD Redemptions and the build up in Government cash balances.

Average daily net injections through LAF repos was Rs 12,951 crore while the MSS unwinding was Rs 25,072 crore. The average daily refinance provided was Rs 2,208 crore.

The call money rates which had generally risen since the IMD redemptions, have shown distinct signs of easing since the last week of February 2006. The call money rate has averaged 6.60 per cent since February 25, 2006.

Looking ahead, Governor said, there was an apprehension that the conversion of recapitalisation bonds into statutory liquidity reserve (SLR) bonds would put pressure on interest rates.

The conversion will spread over a period of time after the current fiscal year, depending upon the liquidity and market conditions, he said.

In the context of fiscal responsibility management bill, RBI has commenced active Open Market Operations (OMO) and these could be intensified as appropriate.

Reserve Bank would continue to undertake monetary operations consistent with the interest rate regime and has a range of instruments to manage liquidity in line with the monetary policy stance.

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