Letters: Liquidity problem

This refers to the editorial "Liquidity trap" (July 17). The recent measures by the Reserve Bank of India (RBI) were designed, inter alia, to restrict the flow of bank credit. The collateral damage is to bank investments in government paper. The yield on the bellwether 10-year bond of the Centre rose by more than 140 basis points to close at 8.1 per cent on July 16. The securities of 10 state government bonds floated on that day were a near disaster. Against the total notified amount of Rs 8,600 crore, competitive bids of Rs 2,210 crore (25.7 per cent) only were accepted by the central bank, obviously due to the high yields demanded. Bids for five states drew a blank. The weighted average yield ranged between 8.50 and 8.87 per cent. The bid-cover ratio was less than two. In the case of Himachal Pradesh, only bids of Rs 100 crore were received against the notified amount of Rs 300 crore. Such results have been seen perhaps for the first time in recent years. I expect the forthcoming RBI auction of gilts of the Centre to meet a similar fate. There are big banks with surplus statutory liquidity rates securities that they have been using to raise funds at the RBI's repo window for exploiting arbitrage opportunities in various markets. They will now demand high yields. If they are not successful they will work off the excess securities against future statutory requirements. The RBI needs to have a strategy for meeting the financial problems of both the central and state governments. Just raising the levels of its ways and means advances to them could only be a temporary solution.

A Seshan Mumbai

Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number