India to deposit government cash in commercial banks

Move will add liquidity and make it easier for banks to cut lending rates.

Media reports said the Indian government's massive cash holdings held by the Reserve Bank of India, the central bank, might soon be deposited at commercial banks.

RBI held some one trillion rupees (US$18.4 billion) in March. This total is outside of circulation and is twice the amount normally held by RBI, which cut back spending to contain its fiscal deficit.

Analysts said keeping that huge amount out of the banking system has created a liquidity deficit that has forced banks to borrow as much as US$29.4 billion from the central bank to meet daily funding needs.

Finance Minister P Chidambaram will soon decide on whether to auction government cash balances now held by RBI to commercial banks. The government currently keeps all its surplus cash with the central bank.

This massive borrowing is far above RBI's comfort zone of US$11 billion, forcing the central bank to buy bonds and pump money into the banking system through open market operations. Moving the government’s cash holdings to commercial banks could also ease yields on interest rate swaps.