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Procurement of excessive revenues of over Rs.100000 crore may be an extravaganza for the government which had already been running into deficits, but simultaneously it is also breeding liquidity crunch in the markets. Bunch of telecom players which have been rampantly vying to win over the 3G licenses are willing to pay as much as to remain afloat in competition with the telecom players. For this they have resorted to heavy loans which resulted in bringing about the liquidity squeeze in the financial markets. In order to finance such loans, banks have resorted to availing the call money loans and have started diverting their finances from the liquid mutual funds to fund the loan requirements of the telecom players. Commercial banks which used to be the prime lenders have become the net borrowers even further aggravating the liquidity problems in the Indian markets. About 5000 crores have been taken by way of Certificate of Deposits. PNB raised over 1100 crores at 6.30% interest for 3 months, State Bank of Hyderabad raised over 51000 crores from RBI @ 5.25%, Canara bank raised over 525 crore, UCO Bank 400 crores.

Such liquidity problem was further aggravated by the Euro crises which had its enormous impact over the Indian markets which tumbled down to close at 4807 on 24th May; 2010. This was because of the fears that the euro crises likely to have its impact globally and FII’s started pulling back their funds from the market on account of such fears.

This liquidity problem is expected to continue further until sincere efforts are put in by the government to make the funds available where they are in demand. Lack of money to fulfill the aggregate demand shall have its ill effects in giving rise to the inflationary expectations in the economy. Where on one hand the Central Banks are contemplating with an idea to increase the reserve rates more in order to tackle the inflation, on the other hand liquidity problem would make such efforts futile.

Liquidity problem is expected to prevail for some more time to come till the funds are being made available to the government in the form of the advance tax payments. However, RBI is trying to deal with the situation by purchasing bonds and making fresh supply of money in the market, but its efforts solely would not help to tackle with the situation till the government parts with its own share. Liquidity squeeze accompanied by heavy credit demand is likely to result in stoking inflation which is already hovering at the higher levels of 13.33%.

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