‘The Reserve Bank move is a small step, but a welcome step’

Lauding the Reserve Bank of India’s proactive step in easing the Cash Reserve Ratio (CRR) to release Rs.17,000 crore in additional funds into the banking system, Finance Minister P. Chidambaram, on Monday, indicated that the government would, in the next one-and-half months, put in place a number of policy measures aimed at reviving growth.

Commenting on the apex bank’s decision to lower the CRR by 25 basis points to 4.5 per cent, Mr. Chidambaram said: “I am confident that between now and October 30, the government is expected to take a number of additional policy measures, and also lay out a plan of fiscal consolidation. The response of RBI on October 30 will be far more supportive of growth.”

With the RBI’s second quarter monetary review slated for October 30, the Finance Minister’s hint, ostensibly, was towards a likely easing of the repo (short-term lending) rate by the central bank, a measure that India Inc had been looking forward to this time round even in the wake the diesel price hike, but were disappointed as the key policy rate was left unchanged at 8 per cent. Giving a clearer indication to journalists of better days ahead by way of lower interest rates, in sync with the government action on the policy reforms front, Mr. Chidambaram said: “It [reduction in CRR] is a small step, but a welcome step. I am not disappointed with the RBI policy. Mid-quarter review by the RBI is encouraging and supportive. “The RBI is slated to take more decisions.”

Planning Commission Deputy Chairman Montek Singh Ahluwalia maintained that the reduction in the CRR will have a positive impact on the system and boost confidence in the economy.

Positive impact

“..what RBI has done is that they have acted in the market by releasing resources. It is the release of resources that will make an impact on the rest of the system. It is a step in the right direction,” Mr. Ahluwalia said while commenting on RBI’s policy action in its mid-quarter review.

Meanwhile, in an interaction with a private TV channel, Prime Minister's Economic Advisory Council pointed out that the RBI move to infuse liquidity in the system through a cut in CRR is “more potent” than a cut in interest rate.

“I said that CRR is a more potent instrument only because CRR acts on the liquidity base of the commercial banks and therefore, even if an announcement is made on the policy rates the Reserve Bank of India will have to take actions either through Open Market Operations or through other mechanisms to provide liquidity,” Dr. Rangarajan said.

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