The Hindu Business Line : RBI to withdraw special market operations

Bangalore, May 14 The Reserve Bank of India has indicated that the special market operations (SMO) for supporting the petroleum refining sector would be discontinued, though no timeline was revealed.

Addressing a press conference here on Thursday, the RBI Governor, Dr D. Subbarao, said, “The SMO was the first unconventional measure of the RBI. Like all unconventional measures, this will also be withdrawn. But we will play it by ear.”

Under the SMO, the RBI purchases oil bonds from the public sector refiners and releases equivalent amount of foreign exchange to them. He said the SMOs were done at market rates and they have benefited the PSU oil companies.

US treasury holdings

Answering questions on the RBI’s increased holding of US treasuries, Dr Subbarao said, “We have taken all risk and return considerations in making the investments.”

According to data available, India’s holdings of US Treasuries till February this year was a record $34.6 billion or a $20 billion increase over the corresponding period of last year.

Well capitalised

Dr Subbarao reiterated that the domestic banking system remained well capitalised and prudently regulated. But he conceded to a credit off-take slowdown. This was despite the “ample liquidity” in the banking system. However, he added, “Compared with the rest of the world, where credit markets have seized, financial markets are still functional.” He pointed out that credit had grown by 17.5 per cent. Orderly functioning of credit markets was also helped by the institutional credit flows to the priority sector.

He said the slowdown in credit off-take was largely on account of muted demand from the corporate sector. Credit to the private corporate sector was likely to pick-up in the coming months.

Referring to the economy, the overall policy objective, Dr Subbarao said, was to restore the economy on to its high growth trajectory, though he declined to specify any recovery timeframe. “I wish I could say when the economy would recover. There are though some incipient signs of recovery.” Among the signs of recovery, he pointed out the ABN AMRO Bank’s purchasing managers’ index that put India at 53.3 in April. A number above 50 is treated as an expansion.

He said, this year however, the GDP growth was estimated at 6 per cent and inflation was likely to be 4 per cent. “Once the global economy begins to recover, India’s turnaround would be sharper and swifter, backed by strong fundamentals,” he added.

Unwinding of policies

The recovery would leave the RBI with a new challenge of “unwinding the current expansionary liquidity policies.” He said that this unwinding would be in coordination with central banks around the world. “There will be no sudden unwinding, but will be transparent with appropriate signals to the markets,” he said.

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