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Our Bureau

Mumbai , Jan. 31

DR Rakesh Mohan, Deputy Governor of RBI, allayed fears about the liquidity crunch and said there were instruments to ease it.

"The injection mode is available through the Liquidity Adjustment Facility (LAF) and there are instruments to smoothen the market. The objective of the policy is to maintain stability in the market through the market stabilisation scheme and other traditional measures," Dr Mohan said at a seminar. He said the injection of Rs 10,000-12,000 crore through the repo-window of the LAF was not abnormal and that unwinding since the IMD redemption of Rs 33,000 crore was still taking place.

With respect to government expenditure, Dr Mohan said there is an issue of "leads and lags." He also said it was difficult to predict how long the pressure on liquidity would last. Dr Mohan said the government bond yield curve compared well with markets such as the US and Europe and any aberration could be attributed to lower trading volumes in some securities. "The yield curve is kinky at some point because of illiquidity as a major portion of securities is held in banks," said Dr Mohan.

On the yield curve flattening post hike in the reverse repo and repo rates in the recent quarterly review of the credit policy, Dr Mohan said the market was responding to the policy measures and that the central bank was observing the market. He said the limit on FII investments in domestic debt would continue. "The limit will stay unless there is capital account convertibility, " said Dr Mohan.

The RBI aimed to keep inflation stable and widen the investor base in government debt, he said.

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