Capital flows, cash balances main Liquidity drivers

Mumbai, July 31: Capital flows and cash balances of the Centre with the Reserve Bank of India (RBI) were the main drivers of the liquidity conditions in the Indian financial market during the first quarter of FY08.

Moreover, Indian financial markets remained generally orderly for the most part of the first quarter, the RBI said here today.

The RBI, releasing the first quarter review of annual statement on monerary policy 2007-08, said the financial markets were orderly during the period. Capital flows and swings in cash balances of the Governments were the main drivers of liquidity conditions in the financial markets, imparting volatility to overnight interest rates.

The Central Bank modulated market liquidity with the help of issuances of securities under the Market Stabilisation Scheme (MSS), operations under Liquidity Adjustment Facility (LAF) and increase in the cash reserve ratio (CRR).

According to the review report, the suffusion of liquidity flows in the finacial markets mainly on account of the sharp depletion of the Central Government's cash balances was reflected in call rates plunging to close to one per cent levels, going even below on several occasions during the period. The total overhang of liqidity under the LAF, the MSS and cash balances of the Central Government taken together declined from an average of Rs 97,449 crore in March 2007 to Rs 72,823 crore on July 27'2007.

However, the outstanding balances under MSS increased from Rs 64,863 crore by the end of March to Rs 90,030 crore by the end of the July 2007 but the cash balances of the Centre with the Reserve Bank declined from an average of Rs 55,893 crore to a debit of Rs 20,199 crore during the same period.

UNI