Mon Feb 7, 2011- RBI sticks to end-March 7 pct inflation estimate: *Drawing down cash balance easing liquidity-deputy

Mon Feb 7, 2011 7:09am EST

*Drawing down cash balance easing liquidity: cbank deputy

*Deposit growth needed to improve liquidity: cbank deputy

*Upside risk to oil prices on Egypt crisis: cbank deputy

*RBI sticks to end-March 7 pct inflation estimate: deputy

NEW DELHI, Feb 7 (Reuters) - 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.

Much of this spending will be financed by the cash balance with the central bank of about 700 billion rupees, while the rest could be funded by another trillion rupees in expected revenues.

Banks borrowed on average around 850 billion rupees daily from the RBI repo window from November through January, which has come off to around 730 billion rupees this month, indicating easing liquidity in the markets.

However, Gokarn said growth in bank deposits will also play an important role in easing the liquidity situation, in addition to accelerated spending by the government.

He emphasised that India's monetary policy stance continues to anti-inflationary, as headline inflation at 8.43 percent continues to be high, with the risk of an upside to oil prices resulting from the unrest in Egypt.

For now the central bank is sticking to its end-March headline inflation forecast of 7 percent, Gokarn said.

India government reducing cash balance with RBI-deputy


High commodity and crude prices pose inflationary risks for India, with persistently high food inflation that is currently at over 15 percent.

Prolonged political turmoil in Middle Eastern countries, led by Egypt, may further deteriorate India's current account deficit and dent investment flows to emerging markets, Citigroup said in a note on Monday.

Higher crude prices could inflate India's already high fuel subsidy burden and stoke higher inflation.

India's current account deficit INCURA=ECI in the September quarter widened to a record high of $15.8 billion as booming domestic consumer demand sucked in imports and service sector exports suffered from weak global demand. [ID:nSGE6BU00W]

(Reporting by Manoj Kumar, editing by Tony Munroe)