Date:20/03/2006 URL: http://www.thehindubusinessline.com/2006/03/20/stories/2006032001400800.htm

Back Liquidity problem

The redemption of India Millennium Deposits and unspent money of Government with RBI have been cited as reasons for the current shortage of liquidity in the system. One additional factor is the cash leakage in the banking sector.

There has been a massive increase in bank credit to the non-food sector, which, in the normal course, should have led to an abundance of liquidity through the operation of the multiplier.

However, as on February 24, currency in circulation went up by 14.9 per cent in the financial year compared with the corresponding position of 9.8 per cent in 2004-05.

Year on year, it rose by Rs 64,487 crore (18.0 per cent) against Rs 36,770 crore (11.4 per cent) in 2005.

The large-scale expansion of currency is strange considering that the Budget for 2005-06 introduced a tax on cash withdrawals from banks. It also raises a question on the possible rise in illegal transactions.

A. Seshan

Mumbai

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