![]() Curbing inflation: Is CRR the way to go?Published on Wed, Feb 14, 2007 at 13:21 | Source : Moneycontrol.com Updated at Thu, Feb 15, 2007 at 10:13 On the expected line, the Reserve Bank of India has raised the Cash Reserve Ratio, the second in last three months, by a steep 50 basis point to 6 per cent. The hike will be effected in two phases to 5.75% from February 17, and to 6% from March 3.
While a further rise in CRR was widely expected considering the runaway rise in inflation (WPI inflation at 6.58%; highest since December 2004) and the RBI's increasing discomfort with it, what has come as a bit of a surprise is the size of the hike. A hike of 50 basis points in CRR appears too steep a rise, especially when the economy is growing at clip of 9% and there are no concrete indications of overheating of the economy. According to analysts, since the current inflation is due to a supply constraint, the Government should have done more measures to sober down the rise in prices of essential commodities. The Government has already taken a few steps in this direction, but more such steps need to be taken. Nevertheless, the hike is seen more as a measure to control the inflationary expectations rather than curbing the inflation itself. This is because any monetary intervention by the RBI to control inflation usually takes time to take effect. And measures like CRR rise or changes in repo rates are aimed at controlling expectations. According to analysts, the Government should have done more on the supply side front as this is one of the major contributors to the inflation kitty. Like it did in the recent past what with reducing import duty on a host of commodities and banning futures trading in tur and urad, the Government should have taken more of such measures to sober down the inflation rate. As this inflation is not a liquidity driven phenomenon, the CRR rise will not make much of a difference, said Indranil Sen Gupta, Chief Economist, Kotak Institutional Equities. According to him, there are two sets of issue here; the first is that there are the supply management measures that are being taken and that need to be taken because this is a supply side imbalance driving inflation. The second is the measures from the RBI that aim at controlling inflation expectations; I do not think anybody is under an illusion that monetary measures at this stage would contain inflation. "I think what the RBI is essentially hoping is that a restatement of its resolve to adhere to price stability will contain inflation expectations because although this is essentially a supply side pressure, the fact is that a sequence of supply side shocks are beginning to elongate inflation at a slightly higher point than is usually the case. I do not think that even the RBI would believe that a CRR hike is going to be very effective against the rains.
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Tags: Reserve Bank of India , Cash Reserve Ratio, RBI , CRR , hike , economy , Government , Indranil Sen Gupta, Kotak Institutional Equities |
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