Liquidity measures by month-end: FM

New Delhi, March 23 | Updated: Mar 24 2006, 05:30am hrs
The Reserve Bank of India (RBI) would take concrete steps to deal with the tight liquidity situation by the month-end.

Finance minister P Chidambaram told reporters after his meeting with the chiefs of public sector banks on Thursday that a sub-committee of five members of the Indian Banks Association has been formed. The committee would meet RBI governor YV Reddy next week to discuss ways to handle the liquidity issue.

Senior bankers said they would urge the central bank to reduce the mandatory cash reserve ratio (CRR) level from the present 5%, release funds locked under the market stabilisation scheme and further liberalise the liquidity adjustment facility (LAF) to tackle the liquidity crunch.

They added that the banking system has locked up funds much in excess of the mandatory 25% statutory liquidity ratio requirement, which could also be used.

Reflecting the tighter liquidity, interest rates have been going up across the board. While ICICI Bank and HDFC Bank have already hiked their rates, call rates have moved up to 7.25% as against 5-6% less than a month ago. The yield on five-year government securities has jumped to 7.22% as against 7.13% earlier this month.

Loosening The Tap

Cash reserve ratio can be pared from the present 5%. A 100 bp cut can release Rs 20,000 cr
Banks holding much in excess of the mandatory SLR can sell part of their g-sec investments
The liquidity adjustment facility may be liberalised and funds under MSS can be unlocked

A committee of five (bank) chairmen representing the IBA will meet the (RBI) governor early next week. We expect that RBI will take some action relating to the issue of liquidity by March 31, Mr Chidambaram said.

The members of the IBA committee would include SBI chairman AK Purwar, Bank of Baroda chairman AK Khandelwal, ICICI Bank MD and CEO KV Kamath, Citibank CEO Sanjay Nayar and IDBI chairman VP Shetty.

IBA chief executive HN Sinor told reporters there is excess SLR of 6% above the requirement of 25%, which could be used for easing pressure on liquidity. He pointed out that a sum of Rs 30,000 crore which is under the MSS can also freed up, while even a one percentage reduction in CRR level would release Rs 20,000 crore in the system.