India government reducing cash balance with RBI-deputy

NEW DELHI: The Indian government has started drawing down its huge cash balance with the central bank, a move which will help ease liquidity in the banking system, a deputy governor at the Reserve Bank of India said on Monday.

The government was unable to accelerate its pace of scheduled spending for most of the second half of 2010. That, coupled with the RBI's aim to keep liquidity in deficit mode because of high inflation resulted in a prolonged tight cash conditions.

"Drawing down of the balances is clearly easing the liquidity situation," said Subir Gokarn, Deputy Governor at India's central bank, the Reserve Bank of India.

"For the moment, it appears that the reduction in government balances is clearly helping to bring the LAF (liquidity adjustment facility) operations into our zone of comfort," he said on the sidelines of a conference.

The LAF is the window through which banks park money with RBI when they are in surplus and borrow during a cash crunch.

The government is scheduled to spend 4 trillion rupees ($88.1 billion) in the March quarter, of which around 3 trillion rupees is still to be spent, analysts say.