RBI should rely on multiple measures to check excess liquidity
The apex bank should rely on a blend of monetary measures like increase in cash reserve ratio and introduction of 'unremunerated reserve requirement' on capital inflows to immobilise the excess liquidity in the system.
By PTI |
MUMBAI: The apex bank should rely on a blend of monetary measures like increase in cash reserve ratio and introduction of 'unremunerated reserve requirement' on capital inflows to immobilise the excess liquidity in the system, a top economist said on Tuesday.
"It would be reasonable to expect that RBI would use a fine blend of measures rather than relying on a single instrument. The danger of using a single instrument is that it has to be used to such an extreme that it results in severe distortions," S S Tarapore, former Deputy Governor of RBI, said at a seminar here.
Tarapore's observation comes a few days ahead of the Reserve Bank's mid-term policy, due on October 30.
A hike in CRR is expected to immobilise about Rs 30,000 crore in the system.
"To the extent the capital inflows continue to be large it would be also feasible to use the instrument of incremental CRR, say 10 per cent, which would immobilise about Rs 20,000 crore in the current fiscal," he added.
Under the instrument 'unremunerated reserve requirement,' of all capital inflows, nearly 10 per cent would be deposited with RBI for a period of one year, which would in turn help to check excess liquidity in the market.
"Considering the recent hike in Market Stabilisation Schemes (MSS), under which bonds are issued to sterilise liquidity, it will not be realistic to expect government to further enhance the ceiling in the current financial year," he added.
RBI had recently enhanced the ceiling of MSS bonds from Rs 1, 50,000 crore to Rs 2, 00,000 crore.
"Unless the government comes with necessary macroeconomic decisions in 2-3 months, the continuing capital inflows may lead to macroeconomic instability in the system. My fear is that all these measures would not suffice to stem the capital inflows in the current fiscal," Tarapore added.
For better management of the macroeconomic situation, the foreign exchange policy and monetary policy should be handled separately by two institutions, he added. PTI UD
"It would be reasonable to expect that RBI would use a fine blend of measures rather than relying on a single instrument. The danger of using a single instrument is that it has to be used to such an extreme that it results in severe distortions," S S Tarapore, former Deputy Governor of RBI, said at a seminar here.
Tarapore's observation comes a few days ahead of the Reserve Bank's mid-term policy, due on October 30.
A hike in CRR is expected to immobilise about Rs 30,000 crore in the system.
"To the extent the capital inflows continue to be large it would be also feasible to use the instrument of incremental CRR, say 10 per cent, which would immobilise about Rs 20,000 crore in the current fiscal," he added.
Under the instrument 'unremunerated reserve requirement,' of all capital inflows, nearly 10 per cent would be deposited with RBI for a period of one year, which would in turn help to check excess liquidity in the market.
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"Considering the recent hike in Market Stabilisation Schemes (MSS), under which bonds are issued to sterilise liquidity, it will not be realistic to expect government to further enhance the ceiling in the current financial year," he added.
RBI had recently enhanced the ceiling of MSS bonds from Rs 1, 50,000 crore to Rs 2, 00,000 crore.
"Unless the government comes with necessary macroeconomic decisions in 2-3 months, the continuing capital inflows may lead to macroeconomic instability in the system. My fear is that all these measures would not suffice to stem the capital inflows in the current fiscal," Tarapore added.
For better management of the macroeconomic situation, the foreign exchange policy and monetary policy should be handled separately by two institutions, he added. PTI UD
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