Cash crunch to ease out, inflation could dip to 6% by March: RBI

Written by fe Bureau | Mumbai | Updated: Jul 30 2010, 04:24am hrs
Reserve Bank of India (RBI) governor on Wednesday said a cash crunch would ease further by next week, but liquidity would continue to be in deficit mode, not surplus.

The system has been in surplus liquidity for much of the last one year except for the last two months. In the situation of surplus liquidity, monetary transmission by definition is quite ineffective and banks have told us that demand for credit has been subdued so that could be another factor that explains weak monetary transmission.

Going forward we expect that (monetary) transmission will take place and we will see some change in the deposit and lending rates of banks, Subbarao said.

He was speaking to analysts in a telephone conference a day after the central bank had raised interest rates more forcefully than expected to fight inflation that is on track to hit double digits for a sixth straight month, setting the stage for more policy tightening.

We expect that the systemic liquidity will be more in the deficit mode than the surplus mode going forward. However, we will see that there could be ... on days a marginal surplus, he said.

The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75%, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 bps to 4.50%. Subbarao expects inflation to fall from the current level of double digits to 6% by this fiscal-end due to moderating food prices, easing commodity rates and the impact of its monetary actions. To the extent that there is a good agricultural production, and to the extent that it softens prices of food products, it will certainly be a positive impact on inflation. But that we will not know and we will not have until another two months, Subbarao added.