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Auction, publicise govt cash balances, says Mohanty report

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BS Reporter Mumbai

The high government cash balance, which has often created uncertainty in liquidity conditions, could now be auctioned to reduce cash volatility, says the Deepak Mohanty committee set up by the Reserve Bank of India to study the operating procedure of monetary policy.

According to the report, a major source of uncertainty in liquidity was the sudden rise in government cash balances. To manage the liquidity arising out of this, the report said RBI did not have any corresponding instrument.

The issue of auctioning of government cash balances is under consideration of the government and RBI, said the report. “If this happens, huge cash balances with the government will not create a liquidity crunch. Government will be able to auction the money temporarily and, hence, will not be forced to spend to maintain liquidity in the system,” said a treasury official with a public sector bank.

 

To help market participants make a better calculation of liquidity in the system, the group suggested the data on government cash balances be made public daily, with a minimum time lag. “As government cash balances have been a major source of uncertainty in liquidity, the dissemination of this information will help improve the assessment by market participants,” said the report. “We will be able to understand the temporary gap in the system, thereby easing pressure on short-term interest rates,” said the treasury official.

The existing liquidity forecasting model needs to be re-examined and the weekly forecasting model should be improved, the working group also said.

“The predictive power of the model has not been satisfactory for the system in a deficit mode,” said the report. Currently, RBI’s liquidity forecast is made weekly, for up to four weeks ahead.

If these recommendations are accepted by the RBI, the data will be a part of the Money Market Operations released daily and also be published in the Weekly Statistical Supplement of the RBI Bulletin. At present, the RBI publishes the information on banks’ cash balances with itself after a lag of three days.

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First Published: Mar 16 2011 | 12:32 AM IST

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