C Rangarajan, chairman of Prime Minister's economic advisory council has applauded the Reserve Bank's monetary policy announcement. In an exclusive interview with CNBC-TV18, Rangarajan said the RBI has taken a wise decision that will relieve the economy of a liquidity strain. But he warned that behaviour of manufacturing inflation is the key. Unless that comes down, the economy will not see the effectiveness of a rate cut.
The CRR cut will infuse Rs 32000 crore into the system. Over a period of time, money multiplier effect will more than double this amount. So is there a fear of runaway inflation again? Ranagrajan does no think so."The action of the RBI will add liquidity into the system, but I believe it will not have an impact on inflation. I think, food inflation will fall by March 2012."
When asked if rates will start declining, Rangarajan said since the relationship between liquidity and interest rate are close, this move will lead to softening of interest rates. He sees overall growth will be close to RBI projection of 7%.
