These would start showing up in higher prices of primary articles as well as manufactured goods. While maintaining there is adequate liquidity in the banking system to meet the demand for commercial credit and other sectors, the Governor advises banks and financial institutions to make sufficient allowances for contingencies, including possible changes in monetary measures. For the full fiscal the demand for credit from the commercial sector is expected to be in the region of Rs. Once you add net government borrowings of Rs.760 bn. This implies an excess of Rs.250-400 bn over the deposit accretion.
Liquidity certainly looks tight.
That interest rates could be expected to harden can also be inferred by the Governor's statement that a reduction in the borrowing programme would be desirable, as it would make a positive contribution to keeping the interest rate outlook positive and stable. We expected the Central Bank to resolve the conundrum of rising bank credit against the backdrop of falling growth in the Index of Industrial Production. However the answers forwarded by the Governor do not inspire confidence. According to him the rise in credit is due to increased exposure to fertilizers, sugar, petroleum and automobiles. On the positive side, the decision of the RBI, in principle to move over in due course to order driven screen-based trading in government securities on the stock exchange is expected to boost the volumes in the government securities market.