Financial Daily from THE HINDU group of publications
Wednesday, Sep 10, 2003
Financial Daily from THE HINDU group of publications Wednesday, Sep 10, 2003 |
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Opinion
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Letters Liquidity and repo cut
Dr Y. V. Reddy, who succeeded Dr Bimal Jalan as the RBI Governor is not new to the RBI or central banking, having served earlier as Deputy Governor, when he oversaw monetary, interest and exchange rate policies. "A pair of safe hands" aptly characterises him. One of his notable achievements in his previous stint was introducing the liquidity adjustment facility (LAF), whereby surplus funds with banks could be placed with the RBI at the repo rate. Similarly, the LAF enabled banks to access liquidity from the central bank, when needed. The LAF has been responsible, in no small measure, for minimising money market volatility, which was endemic in the system earlier. The build up of forex reserves has dramatically changed the profile of the RBI's balance-sheet with forex assets outweighing its holdings of domestic assets of mainly Government securities. The appetite of banks for the last has been so large that devolvements have become a thing of the past.The first problem that Dr Reddy will face is on the rupee. Should he allow the market to determine the pace of currency appreciation? Given the "steady as she goes approach" that has marked his management style, it is likely that he will continue with Dr Jalan's strategy of accepting a strengthening currency as a gradual process. Dr Reddy will face tough issues on the monetary front. It will be an easier call for Dr Reddy. A good monsoon should tame prices. The budgetary situation is likely to improve with better tax revenues on the back of the strengthening economy and disinvestment. He will be comfortable cutting the repo by another 25-50 bp in one or two instalments. S. Balakrishnan Letters to the editor and contributions can be sent by e-mail to: bleditor@thehindu.co.in
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