Mumbai, Jan. 29: The Reserve Bank of India on Friday surprised all financial pundits and the stock market by hiking the cash reserve ratio (CRR) from 5 to 5.75 per cent of their total deposits. This will pull Rs 36,000 crores cash out of the banking system in two stages from February 13. The repo (the rates at which banks borrow from the RBI) and the reverse repo rates (the rate that RBI pays for money taken from the banks) have been left unchanged so that the growth process is not disturbed.
The Sensex sank nearly 100 points when the CRR hike was announced but recovered swiftly when the market realised this would not impact lending rates of liquidity for growth in the immediate future.
The RBI governor Dr D. Subbarao, in his post third quarter monetary and credit policy 2009-10 briefing to the media, said the bankers he had met earlier on Friday morning to discuss credit policy issues informed him that this CRR hike would not put immediate pressure on lending rates. So the good news is that despite the hike, lending rates for housing and personal loans may not go up in the short term. Dr Subbarao said the CRR hike is big enough to signal RBI’s seriousness about tackling inflationary expectations whilst leaving enough liquidity in the system for banks to support the economic recovery process. However, Dr Subbarao said the bankers expressed concern that if the government’s borrowing continued to be large in the coming fiscal, it could put pressure on resources and interest rates as credit is expected to pick up significantly following the economic recovery.
The RBI raised its projections of GDP growth from six per cent announced in its October policy to 7.5 per cent as activity in the real n Turn to Page 2
sector had picked up. Dr Subbarao said even if agriculture growth is near zero the growth in industrial production and services will support the projected growth. Inflation projections, too, have been hiked from 6.5 per cent to 8.5 per cent because of the poor kharif crop, which was down 16 per cent, rising crude prices and the higher than expected rise in food prices that normally come down by November-December. This exerted upward pressure on inflation.
Dr Subbarao exuded confidence as he said the continuing economic recovery has made them change their stance from managing the “crisis” to managing the “recovery”, which is more demanding and leaves little room for error. The CRR hike signals the first major step towards exiting the accommodative monetary policy that prevailed so far. He said though inflationary pressures stemmed from the supply side as the growth recovery increases inflationary pressures which could spill over to other sectors by way of higher input and wage costs.
He also assured that anti-inflationary measures would be tempered so that private investment and consumer spending continues and does not undermine the recovery process. The RBI governor has again done the balancing act between controlling inflation whilst maintaining growth with price stability. He cautioned that the economic turnaround has so far been boosted by government spending domestically. Even globally it is government spending that has kept the economies going. In India consumer demand was boosted primarily by the implementation of the 6th Pay Commission award. It added at least two per cent to GDP growth. He said there would have to be a balance between government spending and private spending.
In this context, he said it was imperative for the government to return to the path of fiscal consolidation. They should start rolling back part of the stimulus package and reconsider the spend on subsidies. He hoped the government would provide a road map for fiscal consolidation in the coming Budget and also spell out the broad contours of its tax policies and expenditure cutbacks. The monetary policy, he said, would not be effective if the fiscal policy, mainly the government’s borrowing programme, is not rolled back.
In addition to risks like crude oil prices rising in case there is a surge in global economic recovery, and hardening commodity prices, the governor said one would have to monitor capital inflows, particularly to emerging markets, including India, as these economies are growing faster.
Age Correspondent
