RBI again raises CRR to rein in inflation

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Credit growth

The RBI press release cites the 'need to contain inflation expectations in the light of the current liquidity conditions,' for a second hike in CRR in just over two months. The year-on-year growth in non-food bank credit up to February 2 was 30.2 per cent as against 33.2 per cent a year ago while aggregate deposits swelled by 23.2 per cent over and above 17.5 per cent a year ago, says the RBI release. The central bank had been releasing funds to banks under repo (banks borrow funds from RBI against gilts) from January 8 to February 7 this year. 'Now, however, an amount of Rs 3,000 crore, Rs 1,750 crore, Rs 2,155 crore and Rs 4,090 crore was absorbed under reverse repo (banks place excess cash with RBI against gilts) on February 8, 9,12 and 13 respectively as against average daily injections of liquidity of Rs 9,814 crore during February 1-7,' the RBI contends. Additional funds of Rs 1,109 crore have been captured till date under the Market Stabilisation Scheme in February.

Analysts are not sure the RBI strategy will work, as it does not have any say on FII and FDI dollar inflows apart from the discontinuity in supplies of farm commodities. In mopping up dollars, the RBI releases rupee funds adding to its flows; if it does not intervene the rupee appreciates, hurting exports while benefiting imports. At some point of time the ploy of jacking interest rates may lose its efficacy and start telling on growth. Deducting 6.58 per cent inflation from the 9.2 per cent growth, the real growth rate comes to around 2.62 per cent, argue analysts.

Taken from Business Line

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