In a clear acknowledgement that a very wide range of measures is in the works to handle liquidity pressures, the government committee on the subject has decided to take more time to give its report. The committee is working in sync with the Reserve Bank of India. It is, therefore, expected that the half-yearly credit policy of the bank, to be released on Friday, could include several steps to make the financial markets in India respond far better to the global financial crisis. While a cut in either the repo rate or the statutory liquidity ratio will go a long way in improving short-term liquidity, a larger list of measures are now expected to assuage long-term liquidity concerns.
The committee headed by finance secretary Arun Ramanthan was scheduled to give an interim report last Friday but has pushed that deadline back.
Two members of the committee confirmed the developments to FE. The decision underscores the spreading impact of the global financial crisis on new segments within India. After mutual funds, the non-banking finance companies are the latest to be hit. Their debt papers have been severely marked down as mutual funds, which were their largest investors, have begun redeeming the papers to meet their own liquidity shortage.
The other category is some of the firms that have used substantial leveraging to finance their buyouts, especially in the overseas markets. The implied volatility on the Indian rupee is at 22.50. This is lower than that of last week but is still much higher than 13.33 in mid-September, when the crisis deepened.
A recent NIPFP paper says preserving the financial architecture in shape was critical to ensuring the pipeline of investment in real sector, estimated at 35% of the GDP as per CMIE data base, was not crippled by liquidity shortage.
Finance minister P Chidambaram had set up the group to make a quick assessment of the requirements of liquidity and advise the government. The group, in its meeting with the bankers and other market players, had discussed wide ranging options, including further cut in cash reserve ratios, lowering of statutory liquidity ratio and further relaxation of external commercial borrowing norms.
Besides Ramanathan, other members of the group are
Bank of India chairman TS Narayanaswamy, UTI Mutual Fund chairman UK Sinha, Larsen & Toubro chief financial officer YM Deosthalee, Small Industries Development Bank of India chairman RM Malla and a representative from the Reserve Bank of India.
?As of now liquidity was related to the market for the short-term only. We have to now look for measures for our long-term needs??, said Keki M Mistri, vice-chairman & managing director of HDFC. Allen CA Pareira, CMD, Bank of Maharashtra, said the recent measures were very timely and necessary. ?It will certainly take care of the banks? liquidity problem for at least another couple of months. But, long-term liquidity will depend on how much credit-deposit (CD) ratio was being maintained by each bank. Credit offtake normally goes up during the second half of the year, particularly in sectors like infrastructure and agriculture. All this is likely to further pressure in the system,? he said.
The week ahead, will actually be very crucial for the Indian markets. The stock markets have breached the five digit numbers to end at 9,975 points, the first time since
July 2006. So factors like Sebi disclosures on short selling by the foreign institutional investors to overseas entities and the corporate earnings data from Reliance Industries, the largest private sector entity, will influence stock markets significantly.