Chidambaram: In control

New Delhi, Oct. 3: The Congress-led government today said it was willing to issue bonds to suck out excess cash from the economy. This will help prevent a flare-up in prices.

Finance minister P. Chidambaram said, “If there is a request from the Reserve Bank of India, we will certainly review it.”

There is a limit of Rs 1,50,000 crore to the issue of market stabilisation bonds, the instrument used in mopping up the excess cash.

Government officials, too, are in favour of a review of the limit and a meeting is likely this week with representatives of the Reserve Bank of India (RBI).

The economy is awash with cash, following the dollar deluge. Renewed interest in Indian stocks on the back of a cut in interest rates in the US has seen foreign institutional investors shovelling $3.6 billion in the last eight days.

In addition, a booming economy is expected to attract up to $30 billion in foreign direct investment this year.

To stem the rise in the rupee, the RBI, through the State Bank of India and other state-run banks, is buying dollars.

But this has released huge amount of the Indian currency in the market, stoking price fears. About $43 billion has been injected by the RBI till July, almost three times the figure of the previous nine months.

The government and the RBI routinely sucks out such excess cash through the stabilisation bonds. However, higher interest payments push up the debt burden of the government.

Another option before policy-makers is a hike in the cash reserve ratio of banks. However, they are averse to using the tool because it adds to borrowing costs and forces banks to raise rates.

Officials refused to comment on speculations about a Rs 200,000-crore limit for the stabilisation bonds. The ceiling has been hiked thrice this year. A review of the limit has become necessary because the amount of such bonds is expected to touch the trigger of Rs 1,35,000 crore.