Liquidity issue is priority: RBI

Written by Banking Bureau | Mumbai, Jan 29 | Updated: Jan 30 2008, 05:59am hrs
The Reserve Bank India (RBI) in its third quarter review of monetary policy for 2007-08 on Tuesday, said liquidity management will assume priority in the conduct of monetary policy through appropriate and timely action. The domestic monetary and liquidity conditions continue to be more expansionary than before and are likely to be amplified by global factors, said RBI.

The overhang of liquidity as reflected in the sum of LAF, MSS and the Central Governments cash balances increased from Rs.85,770 crore at end-March 2007 to Rs.2,58,187 crore on January 17, 2008 before declining to Rs.2,32,809 crore on January 24, 2008.

While non-food credit has decelerated, growth in money supply and aggregate deposits of scheduled commercial banks continue to expand well above indicative projections, said RBI. Indications are getting stronger of upside inflationary risks in the period ahead, said RBI.

There was a large increase in the total overhang of liquidity over the third quarter of 2007-08, reflecting the sizeable expansion in primary liquidity generated by the large accretions to the RBIs net foreign assets. In the foreign exchange market, large inflows have imposed persistent upward pressures on the exchange rate of the rupee which have become accentuated in the wake of cuts in the US Federal Funds target rate.

As on January 4, 2008 money supply (M3) increased by 22.4 % on a year-on-year basis which was higher than 20.8 % a year ago and well above the projected trajectory of 17.0-17.5 %. Reserve money increased by 30.6 % on a year-on-year basis as on January 18, as compared with 20.0 % a year ago. In the current financial year, the growth in aggregate deposits of scheduled commercial banks (SCBs), on a Y-o-Y basis, at Rs 6,00,761 crore was higher than that of Rs.4,44,241 crore a year ago.