Worried over shortage of funds in the system following RBI's liquidity tightening measures
, SBI Chairman Pratip Chaudhuri on Thursday asked the central bank not to choke money supply and instead raise interest rate to check volatility in the forex market.
"Whenever the central bank needs to defend the currency or prevent the inflation from going out of hand, please increase the interest rate, don't choke liquidity," he said during a FICCI-organised Banking Conclave.
Aiming to check volatility in the currency market, RBI has taken a slew of measures including reducing the liquidity adjustment facility (LAF) for each bank from 1 per cent of the total deposits to 0.5 per cent, thus limiting the access to borrowed funds from the central bank. It had also increased the borrowing cost for banks to 10.25 per cent.
"Today the repo rate is 7.25, but funds are not available and from a window money is available at 10.25 per cent. It doesn't help anybody in covering or camouflaging the repo rate. If the repo rate has to be taken to 10.25, so be it but do it in a transparent manner," Chaudhuri said.
The RBI will review the first quarter monetary policy on July 30.
Chaudhuri further said RBI has made it very clear that in the current situation its main priority is to stabilise the rupee and for that some liquidity tightening measures have been brought in.
"We have been told that these measures are temporary and wish they are so," the SBI chief said, adding that the RBI actions to check rupee slide should be fair and transparent.
SBI Chairman in the last year's banking conclave had started a debate by seeking to abolish CRR to enhance liquidity in the banking sector for more productive use.