North Block links liquidity crunch to IMD redemption

The finance ministry Tuesday said the pressure on liquidity was partly owing to redemption of India Millennium Deposits (IMD) and partly on cyclical factors associated with pick-up in growth momentum.

The surplus cash balance of the government also had the effect of contracting liquidity, Minister of State for Finance Pawan Kumar Bansal said.

The central government had a cash balance of Rs 363.55 billion as on February 28, down from a peak of Rs 536.09 billion on December 23, Bansal told Rajya Sabha in a written reply.

"Pressures on market liquidity are partly frictional, arising from seasonal and transient factors including the redemption of IMD, and partly cyclical, associated with the pick up in gro wth momentum and induced demand for bank credit," Bansal said.

The minister said the surplus cash balance of central government arose on account of various factors, including surplus cash balance of state governments, which are invested in 14-day intermediate treasury bills.

State Bank of India had redeemed IMD bonds worth $7.3 billion on December 29. Liquidity in the system has been tight in the last couple of months.

On Monday, the liquidity crunch prompted the government to privately place Rs 100 billion with the Reserve Bank of India, instead of borrowing it from the market. Today, the central bank injected Rs 74.60 billion in the first repo auction.