Letters: Liquidity trap?

Both the government and the Reserve Bank of India have announced that they will undertake further measures to give a boost to the sagging Indian economy. They will do well to take a pause and get an expert analysis of the results of what has been done so far. There is no shortage of liquidity in the economy. In fact, there is a surfeit after the massive injection of funds by the RBI through CRR and SLR cuts and fiscal relief. This is evident from the easy trends in the call money market. More telling are the data relating to the Liquidity Adjustment Facility. In the past, the period during which advance tax payments were made strained the liquidity situation, calling for intervention by the central bank. But now the situation is different.

Despite the tax payments in the second week of December and the sale of dated securities during that period, banks have been depositing surplus cash with the RBI under reverse repo operations. Net of repos they amounted to Rs 20,015 crore on December 15 and Rs 24,200 crore on the next day. The latest data for the banking sector show that non-food bank credit rose by 11.5 per cent in the current financial year (up to November 28) against 8.0 per cent in the corresponding period of last year.

Year-on-year total bank credit registered an increase of 29.8 per cent vis-à-vis 22.5 per cent earlier. Aggregate accommodation from banks through credit and investments in bonds, etc., rose by 11.1 per cent (7.6 per cent). The investment in securities to deposit ratio was 30.12 per cent — more than 6 percentage points above the stipulated minimum of 24 per cent. As against the norm of a credit-deposit ratio of 70.50 per cent after providing for CRR and SLR, it was 74.58 per cent.

The preference to gilts has been the result of the well-anticipated treasury gains in government securities consequent to the expected decline in interest rates, apart from prudential considerations. Industry organisations that complain about the shortage of credit should be advised to give specific examples of companies denied credit facility and then the concerned banks can be asked to explain the reason. It may turn out to be a false complaint.

To give an example, the arrears of sugar factories owed to farmers for the supply of cane are not the result of any constraint in credit. Factories do not avail of credit against their drawing power to the full extent, the reason being that they enjoy interest-free suppliers’ credit! Like Japan, the USA seems to have entered a liquidity trap with its near-zero interest rate. It is too early to talk about it in the Indian context. But the authorities will do well to keep it in mind.

A Seshan, Mumbai

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