The Reserve Bank of India has brought down the Cash Reserve Ratio (CRR) by 0.25 percentage points but left the policy repo rates unchanged. The reduction in the reserve ratio will release Rs.17, 000 crore into the banking system immediately. The expectation is that this extra liquidity will induce banks to reduce interest rates, an outcome keenly sought by sections of industry. The central bank’s approach is tactically sound: a more direct interest rate signal through a repo rate cut would be against the grain of recent monetary policy actions which have accorded primacy to curbing inflation, without entirely ignoring growth concerns. Headline WPI inflation has remained sticky at around 7.5 per cent throughout the financial year. For August it was at 7.55, up from a 32-month low of 6.87 per cent in July. Core inflation pressures remained firm with non-food manufactured products inflation inching up from 5.1 per cent in April to 5.6 per cent in August. In every category, the easing of price pressures on a few items has been offset by a rise in others. Fuel inflation in August has picked up on the back of an upward revision in electricity prices. The recent hike in diesel prices and rationalisation of LPG subsidy will add to overall price pressures.
Inflationary pressures are likely to be underpinned by the recent actions of the European Central Bank and the U.S. Federal Reserve, which will have the overall effect of boosting global liquidity. That in turn will drive up global commodity prices. For India, imported inflation will remain a threat over the near term. All these suggest that there is no way to shift the monetary policy focus away from countering inflation and anchoring inflation expectations. However, even though domestic growth remains sluggish, the recent reform measures announced by the government have, according to the RBI, started reversing sentiments. Reducing fuel subsidies and selling stakes in public sector companies will lead to some fiscal consolidation. But these, like the moves to stimulate foreign direct investment, will take time before their potential benefits are realised. Without in any way discounting monetary policy’s role in supporting the growth revival, the RBI is categorical in stating that continuing inflationary pressures alongside risks emerging from the current account deficit and fiscal deficit constrain a stronger policy response to growth risks. Restricting monetary action to a CRR cut for now is a good idea. It gives the central bank time and space to reorient policy in response to the evolving growth-inflation dynamics.
Keywords: Cash Reserve Ratio, WPI inflation, growth concerns, rationalisation of LPG, price hike, growth-inflation dynamics, monetary policy, Fuel inflation, Reserve Bank of India
Indeed it was s good step from RBI it will certainly help in tackling
inflation up to some extent and for a period of time .But apart from
influx of liquidity in o system need to look at certain other important
aspects like subsidies and price hike in diesel prices .Because increase
in diesel price will led to inflation ,which will reduce the
effectiveness of RBI measure's.Need of hour is to control on fuel
prices then it will make sense.
Actions taken by the UPA government, allowing FDI in aviation and retail
sector, will definitely provide some momentum to economic growth while
reduced subsidy on LPG gas will increase the burden on the shoulder of
middle class families. Although these actions may be good for economy
but scams (read coalgate scam) has badly reflected in the monsoon
session. These reforms can be ray of hope for Honorable PM as well as
UPA for Poll-2014.
At the time of economy's sluggish growth movement, cut in the CRR is a right step, to triggering in engines of economy.
alongwith this, a policy step, to open FDI in retail and others few sector and rationalising diesel and LPG subsidies clearly indicates Gvt's efforts, to revive the present economic picture towards high growth rate.
By keeping the key policy rates unchanged, the RBI has indicated the extent of caution displayed and its renewed resolve to fight inflation unless it comes down to the desired level and for a sustainable growth. The recent decision by the government to hike the diesel price and subsidized LPG cap as a step towards ensuring greater fiscal discipline will put additional pressure on inflation.
A cut in the Cash Reserve Ratio by 25 bps to 4.5% will make the liquidity position of banks comfortable to enable them lend productively. In a nutshell, it is a cautious policy announcement with intent to strike a fine balance between growth and inflation.
It seems the author does not understand Inflation. The standard
definition of inflation is increase in supply of money. Rising prices is
not inflation . Rising prices are the consequence of inflation. So more
liquidity is more inflation and hence higher prices.
Economic planning through manipulation of money and credit does not
work. It creates the bubbles and it creates the problems. were not
going to solve this bubble by doing the more of the sane. Someday we
have to wake up and challenge this whole concept of central economic
planning through central banking as well as the keynesian economics.
Whether we should have intervention in the economy. Why can't the
interest rate be the relation between savers and borrowers as it is
supposed to be. We are witnessing the failure of the whole economic
policy. More liquidity in already liquidity heavy market will create
mal-investments and we will have temporary phony growth, which will
not be sustainable for longer time.What we need is higher interest
rates so that we can have more savings and less spending.
More liquidity is not going to work, cause if it works than no body in
India will ever have to go to work. We will just print the money.We
don't need more liquidity. What we need is more savings and with more
savings the banks can loan that extra money from extra savings to
private businesses and productive jobs can be created.
Every Time the RBI Engages In More Liquidity and Devalues the Rupee, It
Is Defaulting on the Indian People by Eroding their Purchasing Power and
Inflating their Savings Away. The Rupee Has Lost Nearly 50% of Its Value
Against Gold Since 2008 ... This Is a Default. Just Because It Is a
Default On The People and Not The Banks and The Holders of Our Debt Does
Not Mean It Doesn't Count.
The problem is that the people who didn't see the downturn coming and
are unable to understand what were reasons for the downturn are now in
charge to fix the economy.You cannot solve a problem with out
understanding it. The RBI will further destroy this economy and
currency. The 17000 cr injection will give temporary high(like
marijuana) but the hangover will be much worse. We are still in the
hangover of excess liquidity of 2008 and 2009 we don't need more
liquidity. We don't need to print more money, what we need to do is
increase the purchasing power of the rupees already existing in the
market.What we need is stronger rupee not a weaker rupee.This excess
liquidity is not going to work. Cause if works, nobody in India will
ever have to go to work. We will just print the money.
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