In a clear step aimed at addressing overall liquidity crunch fears and bringing Indian Inc on board, the finance ministry today set up a six-member panel to make a quick assessment of the requirement for liquidity and advise it on what needs to be done.
Finance Minister P Chidambaram has asked the panel to begin work immediately and submit an interim report within a week. Sources suggest that the committee would swing into action as early as Saturday itself and possibly visit Mumbai — the financial centre — to meet financial sector players and intermediaries.
The group is headed by Finance Secretary Arun Ramanathan and includes a representative of the central bank, Indian Banks’ Association chairman (also Bank of India chairman) TS Narayanaswamy, UTI chairman and managing director UK Sinha, L&T chief financial officer YM Deosthalee and Small Industries Development Bank of India chairman and managing director RM Malla. The group has been authorised to co-opt more members, if necessary.
The move indicates the government’s seriousness to take any step required to increase liquidity flow to trade, commerce and industry and instill confidence on the Indian economy. “We have identified that the main problem is liquidity, and we have assured the people that we will respond swiftly and take steps to infuse more liquidity according to the needs of the situation,” Chidambaram said in a statement, which was read out by Ramanathan here today.
The move follows a number of representations from banks, other financial intermediaries, corporates and small businesses, who have approached Chidambaram asking that the government address liquidity concerns in a comprehensive manner. “They have impressed upon me that intermediation of credit must take place smoothly and efficiently,” Chidambaram said.
Earlier on Wednesday, India Inc had asked the government to take immediate steps to shore up investor confidence and provide a booster dose to the economy. Two leading chambers, the Confederation of Indian Industry (CII) and the Associated Chambers of Commerce & Industry of India (Assocham), had demanded a Rs 100,000 crore liquidity infusion through rate cuts and easing of overseas borrowing norms. The CII has also asked the Indian government to set up an exclusive fund out of the country’s foreign exchange reserves to invest in Indian securities. The fund, it said, will prevent the depreciation of the Indian rupee, that fell to over Rs 48 to the US dollar today.
In an immediate response to the liquidity crunch, the Reserve Bank of India today further cut the cash reserve ratio, the amount of deposits that banks set aside to meet statutory requirements, by 100 basis points effective Saturday. It had already cut the CRR by 50 bps on October 6. Both the CRR cuts will be effective from tomorrow and will add Rs 60,000 crore liquidity to the banking system, taking the CRR rate to 7.5 per cent, versus 9 per cent till now.
“I welcome the RBI decision. The RBI Governor has also assured the government that the central bank is keeping a close and continuous watch on the situation and will take appropriate steps according to the evolving situation,” Chidambaram has said.
The move comes even as industrial production grew 1.3 per cent in August, as against 10.9 per cent in the same month last year, the lowest since 1998. This has put further pressure on the government to enhance money supply to industry.
