The dash of tokenism in the Reserve Bank’s quarter per cent cut in the cash reserve ratio (the segment of deposits banks must keep with the RBI) reflects the central bank’s intention of supporting the government’s growth initiatives announced last week.
So far it was a one-sided game, with the government failing to do its bit to create an enabling climate of growth, investment and lowering the burgeoning fiscal deficit, despite the RBI’s 13 rate hikes. With the government taking the first steps towards reforms last week, the RBI — despite the heavy shadow of inflation — reciprocated with a CRR cut that will release Rs 17,000 crore into the banking system. But its message was clear: the government has to maintain the momentum of recent policy actions to step up investment, alleviate supply constraints and improve productivity. Food inflation, particularly proteins, is high. Imagine one egg selling for Rs 4.50. It indicates our $1.2 trillion economy can’t even give citizens eggs at a reasonable price!
Inflation in non-food manufacturing products is inching up, and supply constraints and the rupee’s depreciation is putting huge pressure on prices, making them “sticky”. It’s too early to say how much of the Rs 17,000 crore will be passed on to borrowers by the banks. There will be more strain on liquidity in coming weeks due to advance tax payments and the high cash demand in the festival season. The RBI may have been more generous had inflationary pressures and fiscal and current account deficits not cramped its stance.