An expert group constituted by Finance Minister P Chidambaram and chaired by Finance Secretary Arun Ramanathan will meet tomorrow in New Delhi to suggest a slew of measures aimed at lubricating the financial system and the real economy with adequate funds.Separately, the Reserve Bank of India — acutely aware that India Inc’s borrowing costs have jumped and fund availability dried up — may cut its signal repo rate within the next fortnight to boost business sentiment and drive economic growth. For retail bank customers, it may consider extending the scope of deposit insurance from Rs 1 lakh now.According to sources involved in the exercise, the biggest issue to be addressed with some urgency is the restoration of trust among banks. The hesitation to lend within the Indian banking fraternity — in the backdrop of the global financial turmoil — has resulted in overnight lending rates shooting past the 20 per cent mark. In fact, Reserve Bank of India Governor Duvvuri Subbarao wondered aloud, at an International Monetary Fund meeting in Washington, if the government must extend guarantees to the money markets and mutual funds too in a crisis situation like this. For India too, the indirect impact of the global crisis was by no means “insignificant or trivial”, he said. Risk aversion and frozen money markets have reduced fund availability globally which meant additional demand for domestic bank credit in the near term, he added.Clearly, the government reckons these are exceptional times and it is imperative for it and the regulators — the RBI and the Securities and Exchange Board of India — to announce strong confidence building measures. A source in the expert group, who did not wish to be named, said several options including further cuts in the statutory liquidity ratio (the portion of deposits banks have to invest in government securities) and the cash reserve ratio (the portion of deposits banks have to keep with the RBI in cash) will be put on the table tomorrow.He said the Finance Ministry is likely to prevail upon banks to open a line of credit to mutual funds which are facing redemption pressures. A reputed company that tracks mutual funds closely said more than half-a-dozen MFs have faced redemption pressures on their liquid schemes from corporates and high networth individuals in the last 10 days. “The support may come at an extra cost, but it will provide comfort to MFs and confidence to investors to stay put in the schemes,” said a source who did not wish to be named.A government official said besides addressing the liquidity crunch banks and other financial institutions are facing, the expert group would suggest specific measures to ensure that small and medium enterprises — the backbone of Indian manufacturing — do not choke for want of credit. Banks may be asked to work with Sidbi, which caters to the small industry, in putting together a corpus for lending to the SME sector.The RBI had expanded the special liquidity adjustment facility window against 1 per cent of the total 25 per cent SLR holdings recently. Last week, the central bank slashed CRR by a total of 150 basis points to 7.5 per cent. This will release Rs 60,000 crore into the system on Monday, easing the liquidity situation by a good measure. But banks and corporates want more given the fact that SLR requirement in India is one of the highest in the world.As far as mutual funds are concerned, the worry is that liquid mutual funds which have invested significantly in bank certificates of deposits might sell these at distress prices, making it difficult for banks to raise funds from CDs. An open line of credit with banks for such MFs will be a good enough measure of confidence to corporates and high net worth individuals and dissuade them from queuing up for redemptions.While the government is concerned about the impact of the impending recession in the US and Europe on the Indian economy, its immediate focus, the sources said, will be to pump in liquidity. Of course, the government and the RBI too acknowledge that India Inc will have to increasingly borrow from domestic banks since liquidity overseas has dried up. “A rate cut becomes imperative, if not for anything else, but to improve sentiment,” said a bank chairman. This may happen when Subbarao reviews the monetary policy for the busy season on October 24.
