NEW DELHI: Finance Minister P. Chidambaram yesterday assured the people that the main problem of the country’s financial situation was liquidity and that the government will take appropriate steps to defuse this.
“We have reviewed 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. Reserve Bank of India (RBI) was advised to take appropriate steps in this behalf,” Chidambaram said in a statement.
Chidambaram drew attention to RBI having announced a “further reduction in the CRR (cash reserve ration) by 100 basis points, thus making a total reduction of 150 basis points,” he said.
Earlier this week, RBI announced a reduction in CRR by 50 basis points. Welcoming RBI’s decision, Chidambaram said that the governor (RBI) had “assured the government that the RBI is keeping a close and continuous watch on the situation and will take appropriate steps according to the evolving situation.”
Besides, Chidambaram said that he had received a number of representations from banks and other financial entities/intermediaries, corporate and small businesses “that the issue of liquidity must be addressed in a comprehensive manner” and that “intermediation of credit must take place smoothly and efficiently.”
Chidmabaram also announced his decision to “constitute a group to make a quick assessment of the requirements of liquidity and advise the government.”
The finance minister drew attention to a statement made by World Bank President Robert Zoellick, saying: “India is in a position to weather the global financial turmoil.”
He also quoted Asian Development Bank (ADB) President H. Kuroda, that “the impact on the financial sector in Asia is limited this time.”
“Credit is the lifeline of trade, commerce and business and, hence, it is important that credit continues to flow to all sectors of the economy. In consultation with RBI and other regulatory authorities, government will address the liquidity and other concerns about the economy,” Chidambaram said. “It is also important to maintain our confidence in the Indian economy,” he said. Taking note of the Cabinet’s observation, he said: “The fundamentals of our economy are strong and there are many indicators which affirm the sound fundamentals.”
Responding swiftly to global credit crisis, the RBI slashed the mandatory deposit that banks may keep with it by another one percent, which will inject Rs.600 billion in the financial marker and may reduce interest rates. RBI made this announcement soon after the Bombay Stock Exchange (BSE) benchmark index nose —dived by over 1,000 points.
With effect from today, the banks will be required to keep 7.5 percent of their funds with the RBI, as against the earlier 9 percent. In a statement, the RBI said that it is “monitoring developments closely and continuously and would respond swiftly and even preemptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy.” “The Reserve Bank is committed to maintaining financial stability and active and flexible liquidity management using all policy instruments is an integral part of this objective,” the statement read. The RBI’s move, according to Federation of India Chambers of Commerce and Industry (FICCI), will “inject the much desired liquidity in the system.”