Liquidity situation to ease in a month: Rangarajan | delhi | Hindustan Times
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Liquidity situation to ease in a month: Rangarajan

delhi Updated: Nov 11, 2010 18:31 IST
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The Prime Minister's economic advisory panel on Thursday said the current shortage of money supply because of the festive season and public offers of PSUs will start easing within a month because of an expected increase in expenditure by the government and continued capital inflows.

"I think it should start easing in a month time," Prime Minister's Economic Advisory Council Chairman C Rangarajan told reporters on the sidelines of a function organised by consultancy firm SKOCH.

Rangarajan said there is liquidity shortage in the system and RBI's future actions will depend on the unfolding situation.

"I think there is (liquidity shortage)... The whole thing depends upon how the situation develops. If there is extreme tightness in the liquidity, then the RBI will act," he said.

Earlier this week, the Reserve Bank had opened an additional window for banks to borrow and lend money to the central bank till the middle of December.

The RBI had said there has been a liquidity crunch in the system due to festive season demand and the Coal India IPO that sucked liquidity over Rs 15,000 crore out of the system.

Liquidity is expected to be tight even in the days to come, as there are a slew of IPOs lined up and credit offtake is likely to pick up.

A follow-on public offer by Power Grid Corporation of India Ltd is already attracting strong interest in the market and is expected to mop up another Rs 6,500 crore.

Rangarajan said an increase in public expenditure in the second half of the fiscal will also help ease the liquidity situation.

"As you know, in the second half of the year, the public expenditure has also increased and therefore, liquidity tightness may be temporary," the former RBI governor said.

He said capital inflows will also ease pressure on liquidity to the extent they are added to forex reserves.

Rangarajan said the RBI will also have to decide whether it wants to maintain separate rates for short-term borrowing and lending.

"The LAF corridor has been narrowed now. If it can remain at that level... but sooner or later, we will have to decide whether we need to operate two rates. Only one (rates operate) in many nations of the world. We really have to make up our mind about that," he said.

The liquidity adjustment facility (LAF) corridor is the difference between the short-term lending (repo) and borrowing (reverse repo) rates of the central bank.

The LAF corridor is a narrow 1 per cent at present, as the repo rate stands at 6.25 per cent and the reverse repo rate is 5.25 per cent.

The gap was wider when the RBI eased money supply to enable the economy to shrug off the impact of the global financial meltdown that occurred in September 2008.