Date:11/10/2008 URL: http://www.thehindu.com/2008/10/11/stories/2008101156780100.htm

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RBI, government infuse liquidity

Ashok Dasgupta

Cash Reserve Ratio cut further; Chidambaram cancels Washington visit

— PHOTO: KAMAL NARANG

FIRE-FIGHTING: Union Finance Minister P. Chidambaram announcing steps to tackle the financial crisis, at a news conference in North Block in New Delhi on Friday.

NEW DELHI: The Union government and the Reserve Bank of India (RBI) on Friday swiftly moved into the fire-fighting mode to infuse ‘adequate” liquidity into the monetary system.

They assured the people about the safety of the country’s banking system to avert any panic among investors in the wake of the stock market slump triggered by the global meltdown.

As the Bombay Stock Exchange (BSE) suffered a fall of nearly 1,100 points soon after commencement of trading, the RBI announced a further reduction of 100 basis points in the cash reserve ratio (CRR) with effect from Saturday over and above the 50 basis point cut on Monday. This measure alone would release about Rs. 60,000 crore by way of additional liquidity into the banking system which hitherto had been parked in deposits with the apex bank.

The seriousness of the liquidity crisis can be gauged from the fact that Finance Minister P. Chidambaram decided later in the evening to cancel his visit to Washington for attending the meeting of the World Bank and IMF on Monday. This, according to sources, was to ensure his availability here for tackling the crisis arising out of the global financial turmoil and its ripple effect.

In a statement earlier during the day, the Minister sought to assure the market and the industry that the liquidity crunch would be adequately dealt with and the RBI would take further steps in this regard, if necessary.

“We have identified that the main problem is liquidity, and we have assured the people that we will respond swiftly and take steps to infuse more liquidity according to the needs of the situation….Following the cut in the CRR by 50 basis points announced on Monday, October 6, 2008, the RBI has, this morning, announced a further reduction in the CRR by 100 basis points, thus making a total reduction of 150 basis points,” the statement, read out by Finance Secretary Arun Ramanathan at a press briefing, said.

The RBI, Mr. Chidambaram said, was keeping a close and continuous watch on the situation and “will take appropriate steps according to the evolving situation...I have received a number of representations from banks, other financial entities/intermediaries, corporates and small businesses that the issue of liquidity must be addressed in a comprehensive manner. They have impressed upon me that intermediation of credit must take place smoothly and efficiently,” he said.

Simultaneously, Mr. Chidambaram announced the setting up of a committee of bankers and financial experts, under the chairmanship of Mr. Ramanathan, to make a quick assessment of the liquidity requirements and advise the government accordingly.

The committee is to start work immediately and go to Mumbai and submit an interim report within a week, he said.

The other members of the committee are a representative of the RBI; IBA Chairman T.S. Narayanaswamy; UTI CMD U.K. Sinha; L&T CFO Y. M. Deosthalee; and SIDBI Chairman R.M. Malla.