As the stock market crashed under the pressure of global meltdown and the RBI cut the CRR by one percent, Finance Minister P Chidambaram today promised to address liquidity and other concerns of the economy.
He also announced the decision to constitute a group consisting of top bankers headed by Finance Secretary Arun Ramnathan, who is also Secretary (Financial Services) to make a quick assessment of the requirements of the liquidity and advise the government accordingly.
"Credit is the lifeline of trade, commerce and business and, hence, it is important that credit continues to flow to all sectors of the economy. In consultation with RBI and other regulatory authorities, government will address the liquidity and other concerns about the economy," Chidambaram said in a statement.
"It is also important to maintain our confidence in the Indian economy. As the Cabinet noted on Wednesday, the fundamentals of our economy are strong and there are many indicators which affirm the sound fundamentals," he said in the statement, released by the Finance Secretary.
Chidambaram, who is believed to have rescheduled his trip to Washington for attending the meetings of IMF-World Bank and G-20 leaders on the global crisis, stepped in after the BSE Sensex crashed by about 1100 points this morning.
Prompt action by RBI and Chidambarm's statement helped a substantial recovery but the selling pressured emerged to leave the market volatile.
"I have requested the group to begin work immediately, also visit Mumbai and submit an interim report within a week," the Minister said.
Reacting to the measures, bankers said that though liquidity would remain a problem, interest rate may come down.
The Ramanathan group includes representative of RBI, TS Narayanaswamy, Chairman Indian Banks Association and CMD of Bank of India, UK Sinha, CMD UTI, Y M Deosthalee, CFO of L&T and Director Incharge of L&T Finance Ltd and R M Malla, CMD of SIDBI. The group has been authorised to coopt more members, if necessary.
Chidambaram welcomed the RBI decision to reduce the CRR by 100 basis points, thus making a total reduction of 150 basis points (since Monday) to inject a total of about Rs 60,000 crore into the banking system to avert a credit crunch.
"I welcome the decision of RBI. The Governor, RBI, has also assured the government that the RBI is keeping a close and continuous watch on the situation and will take appropriate steps according to the evolving situation," the Minister said.
He said that the group was set up following representations from banks, other financial entities and intermediaries, corporate, and small businesses that the issue of liquidity "must be addressed in a comprehensive manner".
"There have impressed upon me that intermediation of credit must take place smoothly and efficiently," he said.
He recalled that on Wednesday the Cabinet reviewed the financial situation in India and authorised him to issue a statement on behalf of the government.
"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. RBI was advised to take appropriate steps in this behalf," Chidambaram said.