The Reserve Bank of India (RBI), in its Macroeconomic and Monetary Developments for 2009-10, has cautioned that with the revival of credit demand from the private sector touching normal levels, the borrowing programme for 2010-11 could exert some pressure. The government will complete a major part (about 63%) of the gross market borrowing programme for 2010-11 in the first half of the year to ensure that there is no crowding out in the latter half of the year when the private credit demand is normally strong. Given the prevailing comfortable liquidity conditions, the frontloading of borrowings would ensure that the pressure on interest rates could be managed, the report said. The report has further said the strong rebound in asset prices needs to be monitored closely, given their implications for financial and macroeconomic stability. A stronger recovery in India and the favourable interest rate differentials in the face of easy global liquidity conditions could lead to higher capital inflows, which may influence both exchange rate and asset prices.
The key drivers of liquidity during the first half of 2009-10 were open market operations (OMO) to manage the government borrowing programme coupled with market stabilisation scheme(MSS). Total liquidity released during 2009-10 through the unwinding of MSS and auction-based OMO purchases amounted to Rs.1,42,827 crore.
The surplus liquidity, however, declined somewhat in the second half of 2009-10 on account of relatively lower MSS redemptions, absence of OMO auctions, apart from the CRR hike in February 2010, which absorbed primary liquidity of around Rs 36,000 crore from the system.