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Liquidity: Problem of plenty? - Views on News from Equitymaster
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  • Jul 13, 2009

    Liquidity: Problem of plenty?

    From liquidity crunch to liquidity glut
    We have seen in the past few months just how swift financial and economic changes can be. A recent Mint report throws light on how one such change has taken place in the liquidity scenario in the country, wherein things have gone from a huge liquidity crunch to a flood of liquidity in the banking system. As per the report, the CEOs of most large banks in India are facing a lot of pressure on account of the fact that even though the government has injected big amounts of liquidity in the system, loans to the commercial sector have seen a big decline in 4QFY09. In effect, leaving banks grappling with the excess funds they are holding.

    Banks have been facing a lot of pressure from the RBI as well as the government to cut loan rates. The policy rate has come down from 9% in September to 3.25% now. Another big source of liquidity has been the cut in CRR (cash reserve ratio), from a high of 9% in September 2000 to 5%, thus infusing an additional Rs 1.6 trillion into the system. But banks have been extremely reluctant to cut their lending rates so far, which now stand at about 11% to 12.25% (PLR or Prime Lending Rate). If this huge glut in liquidity were to continue and credit demand does not pick up anytime soon, you may soon see borrowing costs and deposit rates come down further going forward.

    First speed-breaker to ambitious road plans
    Just last week we spoke about how the minister for road transport and highways, Mr. Kamal Nath, has announced plans to spend almost Rs 1,000 bn for construction of 12,000 km of highways in the current financial year. We also spoke of how this could give a big fillip to many sectors catering directly or indirectly to this sector. But whether these plans could be relied upon was the big question. Now, reports of the first impediment to these plans have already come in.

    Some restrictive bidding norms that the government has put in place threaten to put a big spoke in the wheel as they block investment of at least Rs 100 bn in roads and highways. One of these norms is that an application for a bid would be disqualified if an investor or its associates holds at least 5% in another company, which is applying for the same project. But many of the companies that intend to bid for road projects have common investors who hold more than 5% in them and this is holding them back. The time it takes for the government to resolve this issue and have a relook at these restrictive norms will determine how much of a delay takes place on this account.



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