Reddy says liquidity moves working

The Reserve Bank of India (RBI) governor Y V Reddy today said the liquidity management in recent days has proved to be effective.

Hinting that RBI intervention in the foreign currency market was more to do with cooling down the overnight lending and borrowing rates, Reddy said: "The call rates are within the desired corridor (between reverse repo and repo rates).... and the liquidity balance is where it should be."

The reverse repo rate is 4.75 per cent, while the repo rate is 6.00 per cent.

Through reverse repo, RBI sucks out liquidity, while through repo it injects it into the banking system. Banks providing funds to the RBI in exchange for securities through the reverse repo window is a barometer of easing liquidity.

Today, banks submitted excess funds to the tune of Rs 5,500 crore "" higher than Tuesday's surplus levels of Rs 1,015 crore. Earlier call rates were volatile ranging below 4 per cent and shooting up above the 6 per cent mark.

The governor also expressed satisfaction on the expansion of credit from the banking system, stating that "genuine economic activity" had kicked off. Tightening liquidity conditions had seen the inter-bank call rates rising over 6 per cent levels.

With central bank intervention in the currency markets last week, call rates have in the last few days stabilised around 4.75 per cent.

The RBI is understood to have bought over $1 billion in the currency market, and injected the equivalent amount in rupees into the system. This helped quell the dearth of domestic liquidity.

"Credit is growing and we are happy with it. This is what we had been trying for a long time. Now there is an investment pick-up and the business confidence is up. There is genuine economic activity and this is a matter of satisfaction," said Reddy.

The rate of growth of credit has surpassed that of deposits this fiscal. He was speaking at the sidelines of an RBI function to release the journal of quantitative economics in memory of late professor M J M Rao.

On inflation, the governor said that oil prices will settle down, giving some comfort level. "There are some signs of better informed judgement of demand-supply and inventory of oil. While geo-political uncertainties continue, speculative activity has considerably abated," Reddy added.