RBI to ensure tight liquidity via bond buys

SRINAGAR: The Reserve Bank of India Governor, Duvvuri Subbarao, has reiterated his stance that he would manage liquidity issues through bond purchases as liquidity in the system remains tight despite the government beginning to spend. The governor said the central bank does not intervene in the foreign exchange market to manage liquidity as interventions distort the market.

"We will manage liquidity, we will ensure that it is within plus or minus 1 per cent of net demand and time liabilities, subject of course to frictional constraints that we face," Subbarao told reporters in Srinagar after a board meeting. "There are uncertainties about liquidity in the system. We will try to manage that actively."

Banks' borrowing from the RBI in the liquidity adjustment facility remains high at around Rs 1 lakh crore a day even though the central bank's stated objective is to keep the deficit at about 1 per cent of bank deposits, or approximately Rs 65,000 crore. Bankers and traders blame the government's lack of spending to contain fiscal deficit, in an attempt to prevent a ratings downgrade. But the austerity measures are affecting liquidity in the system.

On Cobrapost expose of alleged money laundering by bankers, Subbarao said the probe will be taken to its logical conclusion. "The internal report is prepared and (now) processes will be followed to take the investigations to the logical closure," Subbarao said.