Question

how keeping money in bank can reduce corruption or money holding from the economy?

Answer 1

At a recent Bi-monthly Monetary Policy press conference, Governor Raghuram Rajan talked about the RBI’s strategies to narrow down the liquidity corridor in the economy and move towards a more neutral position. This comes in the wake of the report by the Urjit Patel Committee, an expert committee appointed to examine the current monetary policy framework.



The Central Bank has thus far been to keep the liquidity shortfall equivalent to one per cent of the banks’ net demand and time liabilities (NDTL). However, now the move will be towards a position closer to neutrality. This transition will require a release of about Rs 90,000 crores into the system over a period of time. No commitments for time lines have been made yet. “The period depends upon market condition, and flows that come in,” says Rajan.

What is surprising is that despite efforts made by the Central Bank to reduce liquidity deficit, there has been a spike in cash in public hands. The RBI admitted that there is extra Rs 60,000 crore in the hands of the public, which is abnormal. “A couple of new sources of deficit need to be looked at and how permanent they are,” says RBI Chief. “One is that government balances have increased over the year and also, cash with public has increased."

“Around election time, cash with the public does normally increase. You can guess as to reasons why, we can also guess," jested the governor (Watch).

As indicated by Ranjan, the upcoming Assembly elections in West Bengal, Tamil Nadu, Kerala, Assam and Union Territory of Puducherry to be held in May 2016 could be one of the reasons for this spike. These states have a combined voter population of 225 million and opportunities for vote-rigging abound.