Measures to ease liquidity will continue.
The Reserve Bank of India (RBI) today said it would hold on to the rates at which it lends to banks and mops up liquidity from the system, even as industry asked the central bank to re-look its monetary policy and intervene in view of industrial growth slowing to a 16-month low of 4.4 per cent in September.
“In light of the IIP (index of industrial production) data, we would urge RBI to re-look at its monetary measures and intervene in time to arrest this slowdown in manufacturing,” Federation of Indian Chambers of Commerce & Industry Secretary General Amit Mitra said. The PHD Chamber of Commerce & Industry too asked for credit at reasonable costs to boost demand and reduce production costs. Higher money supply runs the risk of stoking inflation. Though there is evidence of a slowdown in manufacturing, Inflation, at 8.62 per cent as on September 30, is higher than RBI’s comfort level of 5.5 to 6 per cent.
RBI Deputy Governor Subir Gokarn, however, told a Confederation of Indian Industry seminar today that the central bank would ‘wait and watch’ the rates. “As a result of recent downtrends in inflation rate and deceleration in IIP, we have signals that it is time to wait and watch the rates in the immediate future.”
Gokarn held out a promise to provide liquidity to the banking system from measures similar to the ones RBI announced earlier this week. “Our monetary policy stance remains focused on the growth-inflation balance amidst uncertainty,” he said.
RBI is looking at existing measures including relaxing the Statutory Liquidity Ratio (SLR) for banks, open market operations and rescheduling the government buyback of bonds to ease liquidity without signalling any letup in the fight against inflation, Gokarn said.
Faced with liquidity shortage, banks borrowed Rs 118,570 crore from RBI yesterday. Banks have been borrowing more than Rs 100,000 crore from RBI since November 8. RBI on November 9 re-introduced its measures to ease tight liquidity conditions until December 16.
“It is very difficult to raise rates on the one hand and reduce cash reserves requirement. These two are contradictory signals,’’ said Gokarn. “So we are looking at ways we have already implemented in the past few weeks — some relaxation in SLR limits, some open market operations, government’s rescheduling buybacks; all of these are ways in which short-term liquidity problems can be handled without sending the wrong message about our stance on inflation.”
RBI opened a second liquidity adjustment facility (LAF) and additional liquidity support under LAF up to one per cent of net demand and time liabilities. It also said banks will not be penalised for any shortfall in maintaining SLR of 25 per cent arising out of using this facility.
Inflation is ruling high because food prices have not softened in spite of the good monsoon rains. Highlighting food inflation as a risk and a challenge, Gokarn said India needs higher production of food grain. India also needs to be watchful of importing inflation as global commodity prices rise, he said.
“We do need strong recovery in advanced economies for the global economy to stabilise,” he said. “Indian IIP for the past few months has been decelerating. The global climate doesn’t show a reassuring picture.”
Gokarn said while IIP suggested deceleration, it raised questions whether it is because of the slowdown in investment activity and, if that is the case, is it because of the rising cost of funds or weaker expectations of future growth, or a combination of the two? But figures for the September quarter on tax revenue collection and corporate earnings suggest a steadiness, he said. The authorities have to look at all indicators and not just one (IIP), he said highlighting the current situation.
