Don't get surprised if RBI's anti-inflationary measure while addressing one problem aggravates another, says Manish K. Pandey
As per onlookers, Duvvuri Subbarao, Governor, Reserve Bank of India (RBI), seemed little nervous while announcing the Q3 Monetary Policy Review last week on January 29, 2010. And why not? After all, he had a challenging task at hand – to tame price instability without jeopardising the country’s economic growth. Although he hiked the cash reserve ratio (CRR) of banks to 5.75 per cent from 5 per cent (this was higher than market expectations of a 50 bps hike on the CRR), and left the repo, reverse repo and bank rates unchanged at 4.75 per cent, 3.25 per cent and 6 per cent respectively, but then by doing so, was he really able to achieve what he wanted?
If one looks at the overnight money market rates, they have been close to the lower band (3.25 per cent) of the liquidity adjustment facility (LAF) for quite some time now, reflecting the huge liquidity bulge. In fact, the banking system has been depositing over Rs.1 trillion on a daily basis under the LAF window of the Central Bank during the current fiscal.
Considering this, the two-phased hike in CRR (RBI plans to implement the CRR hike in two stages – a 50 bps increase on February 13 and the remaining 25 bps increase on February 27), which is expected to squeeze out Rs.360 billion of liquidity from the system, is certainly not going to make much of a difference to the ongoing supply-demand imbalance. Further, an immediate hike in interest rates is also an unlikely phenomenon (most bankers have already pointed this out). So the moot question is: Did Subbarao make a right choice by just increasing the CRR for now? Should he have raised the key policy rates as well? ... Or rather left the both untouched?
As per onlookers, Duvvuri Subbarao, Governor, Reserve Bank of India (RBI), seemed little nervous while announcing the Q3 Monetary Policy Review last week on January 29, 2010. And why not? After all, he had a challenging task at hand – to tame price instability without jeopardising the country’s economic growth. Although he hiked the cash reserve ratio (CRR) of banks to 5.75 per cent from 5 per cent (this was higher than market expectations of a 50 bps hike on the CRR), and left the repo, reverse repo and bank rates unchanged at 4.75 per cent, 3.25 per cent and 6 per cent respectively, but then by doing so, was he really able to achieve what he wanted?
If one looks at the overnight money market rates, they have been close to the lower band (3.25 per cent) of the liquidity adjustment facility (LAF) for quite some time now, reflecting the huge liquidity bulge. In fact, the banking system has been depositing over Rs.1 trillion on a daily basis under the LAF window of the Central Bank during the current fiscal.
Considering this, the two-phased hike in CRR (RBI plans to implement the CRR hike in two stages – a 50 bps increase on February 13 and the remaining 25 bps increase on February 27), which is expected to squeeze out Rs.360 billion of liquidity from the system, is certainly not going to make much of a difference to the ongoing supply-demand imbalance. Further, an immediate hike in interest rates is also an unlikely phenomenon (most bankers have already pointed this out). So the moot question is: Did Subbarao make a right choice by just increasing the CRR for now? Should he have raised the key policy rates as well? ... Or rather left the both untouched?
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