News: RBI says liquidity in Indian banking system high

(RTR 06/07/2006) Chennai - The Reserve Bank of India's (RBI) deputy governor said on Thursday liquidity in the banking system was high due to healthy government expenditure.

Deputy Governor Rakesh Mohan, speaking after a RBI board meeting, said: "Liquidity has increased in the last few months relative to the end of the last fiscal year. The government expenditure has been quite healthy during the last couple of months."

"Obviously liquidity also varies according to the level of government expenditure and the level of cash balances."

Liquidity, as measured by lending to the central bank through its daily reverse repo auctions, rose to nearly 710 billion rupees on Wednesday, from 55.80 billion rupees on March 31.

The bond market has been expecting the central bank to raise its key rates - reverse repo rate and cash reserve ratio (CRR) - when it reviews monetary policy on July 25.

"Speculation (on a rate increase) is certainly there. CRR would be hiked, as the market expects the central bank to control liquidity," said Siddharth Mathur, an analyst with J.P. Morgan Chase.

The CRR, which is now at 5 percent, is the reserve that banks need to hold with the RBI. It is calculated as a percentage of net demand and time liabilities.

The RBI, which raised its key short-term rate by a quarter point to 5.75 percent in June, is expected to raise the rate to 6 percent.

Mohan said the RBI would review monetary policy targets and forecasts in its July review. Asked whether it would review its 5.0-5.5 percent inflation estimate, he said : "I can't say that, unless we make up our minds."

"There is international concern on oil prices and this continues," he said when asked if high oil prices would further push up inflation. Global oil prices rose to $75 a barrel on growing tensions over Iran's nuclear programme.

Responding to a question whether high liquidity is pushing up inflation, Mohan said: "Again, if that's the case, we will make a statement in the first quarter review."

India's wholesale price inflation is forecast at 4.92 percent for the 12 months to June 24, lower than the previous week's 5.44 percent, a Reuters poll of 10 analysts showed on Thursday.