Banking System gasping for liquidity, says Assocham

December 24, 2010 : The economy will continue to face tighter interest rates after a small gap, for the major part of 2011 as inflation still hovers much over the estimated levels and liquidity getting weaker due to larger than expected credit growth and lower deposit growth due to almost negative yield and government borrowing not seeing any halt, says assocham

Faster credit growth has put pressure on the liquidity of Banks . This crunch is likely to slip to year 2011 as the high inflation rate has dissuaded investors to park their funds with banks which is reflected in low deposit growth. The RBI recent mid quarter monetary policy has supported for additional liquidity measures to sustain growth in credit off take and sustain the growth momentum.

The reduction in SLR to 24%, additional open market operations (OMO) to repurchase securities within the next month to the extent of Rs 48,000 Crores, reduction in government borrowings to Rs 6000 Crores as against Rs 11,000 Crores per week, are welcome steps to ease the liquidity mismatch. However the rising food inflation which again crossed double digit, are areas of concern and worry,

Assocham strongly feels that the large borrowings by Banks from RBI repo window to the extent of Rs 1.59 lakh Crores lately, has shown extremely high demand of funds in the growing economy with expected GDP racing towards 9% by 31st March, 2011. It is also surprising that RBI holds credit balance of around Rs 1.00 lakh Crores in current account on government account. It is expected that the year-end payments and disbursements by the government would inject additional liquidity in the system.

The large outflows on Advance Tax, 3G Spectrum auction as well as increased deposit interest rates by commercial banks is likely to return to the system and is a very positive impact on enhanced deposits and ease the large liquidity demand on account of expanded credit off take.

The inflationary pressures as well as expectations are again building up with commodity prices all over the world shooting up as well as Crude touching 90 US $ per barrel. This is very positively put pressure on RBI to go in for tighter monetary policy instance as the Inflation continues to be far in excess of tolerance level of 5.5% p.a. as projected by the end of the current fiscal year.

The days ahead are extremely dicey with Growth estimated to be around 9% p.a and inflation, one of the highest in the world for consistently long period. The options with RBI are limited as the growth is not likely to be sacrificed for inflation. Hence there is every likelihood of policy rates to inch up in the next Monitory policy announcement on 16th Jan., 2011 by RBI.

A clearer picture will emerge only if the inflation is reined and expectations are drowsed which though expected to be worry some, will force RBI to increase policy rates instance.

( This is a Press release of Assocham)

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