Open Market Operation better tool to ease liquidity: PMEAC

The Reserve Bank should buy government bonds from open market rather than use instruments like Cash Reserve Ratio (CRR) to infuse liquidity into the system,said the Prime Minister's economic advisory panel.

Written by Agencies | New Delhi | Published:February 22, 2012 9:41 pm

The Reserve Bank should buy government bonds from open market rather than use instruments like Cash Reserve Ratio (CRR) to infuse liquidity into the system,said the Prime Minister’s economic advisory panel.

“In my view Open Market Operations (OMOs) are better instruments (to ensure liquidity in the system),” because it can be timed and calibrated according to the liquidity requirements,Prime Minister Economic Advisory Council (PMEAC) Chairman C Rangarajan said here.

The Reserve Bank bought debt of Rs 90,554 crore since November through OMO with an aim to infuse liquidity into the system. Under OMO,the central bank buys or sells government bonds in the open market affecting liquidity situation.

The Reserve Bank in its last policy review reduced CRR,the amount the banks are required to maintain with the central bank,by 0.5 percentage point to 5.5 per cent to release Rs 32,000 crore of primary liquidity into the system.

The central bank is expected to take more steps in its policy review on March 15 to ease liquidity situation to promote economic growth which is expected to moderate to 6.9 per cent in the current fiscal from 8.4 per cent a year ago. On increased market borrowing by the government to fund rising fiscal deficit during 2011-12,Rangarajan said it has crowded out credit for the corporate sector.

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