Ahluwalia pitches for lowering key rate

New Delhi, Oct 14 (PTI) The Planning Commission Tuesday
suggested that the key rate (repo) at which Reserve Bank of
India (R.B.I.) provides short-term liquidity to banks should
be lowered, as it would automatically bring down commercial
interest rates.

"The only interest rate which you can change is the repo
rate which is the maximum short term rate at which the banks
can borrow from R.B.I. Yes... you can lower that rate, and it
probably would be a signal but that will not determine the
structure of lending rate.
Repo rate is 9 per cent and Reverse Repo as well as Bank
rate stand at 6 per cent. R.B.I. cut C.R.R., the amount of
cash banks need to keep with the central bank, by 1.5 per cent
in two tranches last week releasing Rs 60,000 crore into the
cash-starved banking system.
"When you expand liquidity, interest rates will
automatically come down," Commission Deputy Chairman told PTI
when asked about the task ahead to overcome the impact of the
global financial crisis on India.
Replying to questions on R.B.I. shifting from tight
monetary policy till a few weeks back to a liberalisation
stance, he said: "I don't regard the steps that government has
taken as a contradiction or reversal of earlier policy as if
the earlier policy was wrong.
"Rather, it is the correct response in the light of the
change in the international situation which has led to drying
up of liquidity even in India."
On the task ahead, he said: "I think the most important
thing right now is to ensure that there is trust in the system
and that the banks function effectively. There were complaints
that liquidity was reduced and people were not able to borrow
easily from the banks... this problem has been eliminated for
now."

Analysing the reasons for the problem of financial
crisis, Ahluwalia said it was really the consequence of a
global financial development.
"When there was a lot of liquidity coming from the
external sources, we were restraining the domestic liquidity
that we were creating. Now that the external sources have
temporarily dried up we are expanding domestic liquidity that
is being created.
"The 150 basis points cut in C.R.R. became operative on
Saturday and would be reflected in lending later," the plan
panel chief said.
"There should be no assumption whatsoever that the
monetary policy of the last year or so is the cause of the
present problem. In fact, the tightness of liquidity has been
evident only in September. Up to September, there was little
evidence of tightening of liquidity.
"From September onwards we have felt the effects of
international shrinkages of liquidity. Many of our firms that
were borrowing abroad suddenly found that they would not be
able to do so or only they can do so at much higher interest
rates," he said.
He further said foreign institutional investors (F.I.I.s)
who are investing in India are feeling tightening of liquidity
in their home bases and began to redeploy their resources so
there was so some outflow from the Indian market. PTI CS