Higher Government spending and growing capital inflows in the second half of the current fiscal are expected to ease liquidity concerns in the banking system, said Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.
The inflation rate based on the wholesale price index is seen declining to 6.5 per cent by December-end, against 8.58 per cent in October.
Liquidity conditions in the banking system have been tight since early September. In the last few weeks banks have borrowed, on an average, over Rs 1 lakh crore daily from the Reserve Bank of India under its liquidity adjustment facility to tide over the liquidity crunch.
"RBI will have to watch the liquidity situation and take such action as may be necessary.
It is true that in the last quarter of the fiscal, public spending increases. I would expect that the liquidity situation would begin to ease as public spending starts increasing.
The capital inflows will also pick up during the last quarter and that would also help in easing the liquidity situation," said Dr Rangarajan. CRR cut is not the only way that can improve the liquidity situation, there are other ways by which the RBI can do it, he added.
On inflation, Dr Rangarajan said, "There is a definite trend for inflation to fall. As far as primary articles, fuel and power are concerned we have data of about two weeks ago. They do indicate that food inflation has come down. If this trend persists then perhaps, no further action (by RBI) may be required. We think that by end of December inflation should come down to 6.5 per cent."
GROWING CAPITAL INFLOWS
Dr Rangarajan said the economy can absorb up to $70 billion of foreign capital inflows. "The current account deficit is also widening so it is expected that the larger share of capital inflows will go into financing the current account deficit. The estimated deficit will be around 3 per cent of the GDP which is around $45-50 billion. Therefore, I think that up to $70 billion of capital inflows should not cause any disruptions," he said.
He warned that if capital inflows exceed $70 billion then "there is the issue of feeding the asset price bubble".
+1.jpg)
0 comments
Post a Comment