The Reserve Bank of India (RBI) today said the government should start spending to ease the liquidity situation that has significantly tightened towards the end of 2010.
"It is expected that the government would spend in order to meet its committed expenditure for the year during the ongoing quarter, which is the last quarter of the financial year," the apex bank said in its macroeconomic review released today.
The liquidity conditions tightened significantly to the point of imposing constraints on growth in the terminal months of 2010, it said.
As of December, the government surplus increased at Rs 1,44,437 crore compared to Rs 93,425 crore in November, 2010.
With government cash surplus beginning to flow back into the system, the liquidity position would improve, it said.
The policy noted that liquidity conditions remained tight during the third quarter of 2010-11, warranting liquidity easing measures by the RBI.
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Tightness in liquidity during the third quarter (October-December) prompted competition among banks, leading to higher deposit and lending rates, thereby, making monetary policy more effective.
Several banks have also revised their base rates upwards in the range of 25-100 basis points during July 2010-January 17, 2011, and the associated increase in effective lending rates could be expected to contain demand pressures, going forward, it said.
Recognising the need to firmly anchor inflationary expectations and contain inflation, the RBI has raised policy rates six times since March 2010, it said.
The RBI injected large primary liquidity through repo and open market operations, which was reflected in the high growth of base money, it said.
Besides, it reduced the Statutory Liquidity Ratio (SLR) requirement from 25 per cent to 24 per cent with effect from December 18, 2010.
This was necessary to avoid the risk of liquidity stress adversely impacting the real economy, even though the overall anti-inflationary stance was sustained throughout, it added.