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RBI says looking to ease liquidity crunch

The deputy governor of India's central bank said today that the bank was looking at additional ways to ease the liquidity crunch such as rescheduling or restructuring bond auctions and open market purchases of bonds.

business Updated: Nov 13, 2010 17:03 IST

The deputy governor of India's central bank said on Saturday that the bank was looking at additional ways to ease the liquidity crunch such as rescheduling or restructuring bond auctions and open market purchases of bonds.

The central bank had reintroduced measures on Tuesday to provide liquidity comfort to banks and relaxed statutory liquidity ratio (SLR) norms to avail additional funds of up to 1 per cent of deposits.

Such initial measures did not work to convince the market that liquidity would ease. Government bond yields and swaps rose sharply this week due to the cash crunch and the market wants more steps to infuse liquidity.

The central bank said after its last policy review at the start of November it would work to ease the liquidity crunch.

But it said any steps it would take to do so should be seen as distinct from policy tightening measures that have been implemented to tame high inflation.

"We are looking at ways such as the relaxation of SLR limits, open market opportunities, government rescheduling or restructuring of auctions or buyback," Subir Gokarn said.

"All of these are ways by which short-term liquidity problems can be handled without giving the wrong signals about our inflation stance," Gokarn said.

Banks have been borrowing on an average 1 trillion rupees ($22.3 billion) daily from the central bank repo window in the last week compared to around 600-700 billion rupees in October, indicating the increased cash tightness.

The central bank has raised its key policy rates six times since March and said it was unlikely to adjust rates again in the near future.

Gokarn said inflation remained a "critical problem" and that high commodity prices were exacerbating price rises.

He also said there was a mixed growth outlook for the economy, with overall growth accelerating, but industrial output growth <INIP=ECI> slowing in the last two months.

India's economy is seen growing at around 8.5 per cent or more this fiscal year. Industrial output growth slowed in September, weighed down by a decline in capital goods production.

"IIP (industrial production) is a cause for concern on account of the sharpness of decline but (the) economy is not slowing as other indicators are still strong," he said.