Money & Banking
RBI may opt for CRR cut in monetary policy review on Tuesday: Experts

Experts say the tight liquidity condition will continue for a while till the government starts spending, and this makes a case for lowering of CRR

New Delhi: Moderating inflation has raised hopes of a rate cut by the Reserve Bank of India (RBI) in its mid-quarter review of monetary policy on Tuesday, but experts believe that it is more likely to cut the cash reserve ratio (CRR) for banks, reports PTI.


There has been some tightening on the liquidity front due to advance tax outgo. Following this, the banks’ borrowing from the RBI has gone up to Rs1.46 lakh crore today, from Rs64,445 crore on Friday.


Experts say the tight liquidity condition will continue for a while till the government starts spending, and this makes a case for lowering of CRR.


Indian Overseas Bank chairman and managing director M Narendra said, “ on date since liquidity still has been slightly tight, I think there will be some more support to liquidity (through CRR cut).


“We will not be surprised if there will also be a symbolic repo rate cut now and a major cut in January also.”


SBI managing director Diwakar Gupta said RBI should consider cutting both repo rate and the Cash Reserve Ratio (CRR). “As a banker I can always say that our wish-list is that rate should change, they should reduce. Both repo and CRR,” he said.


Repo is the rate at which RBI lends money to the banks. It stands at 8% at present, leading to a high interest rate regime—much blamed for slowing industrial growth. Cash reserve ratio (CRR) is the portion of deposits banks have to mandatorily park with RBI, which is 4.25% now.


“CRR has already been brought down significantly by the Reserve Bank, if they do a little more that will be great.


“Repo cut will actually bring down rate systematically in the system. So, deposits will be cheaper therefore people will lend cheaper. Overall, there will be a downward bias which has been required,” Mr Gupta said.


Inflation declined to 10-month low of 7.24% in November from 7.45% in the previous month, raising hopes that RBI may cut rates to spur growth.


At the same time, the economic growth in the first half of the fiscal fell to 5.4%, as against 7.3% in the year-ago period. The growth in 2011-12 had fallen to a nine-year low of 6.5%.


Asked about the likely RBI’s policy action, Chief Economic Adviser Raghuram Rajan said the role of the finance ministry or the government is to increase the real side growth. The RBI will look at the monetary side.


Industry leaders have been demanding a cut in interest rate for long to prop growth and investment.


As the inflation is at its 10-month low, it is time for the RBI to take measures to ensure that interest rates are reduced, irrespective of the tools it may choose to use, Assocham president Rajkumar N Dhoot said.


On concerns of sticky inflation, the RBI had left key policy rates unchanged in its last quarterly review of the monetary policy in October but hinted at easing monetary policy further in the January-March quarter.


“As inflation eases further, there will be an opportunity for the monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory,” RBI governor D Subbarao had said in the October policy review.


However, investment bank Goldman Sachs expects the RBI to cut its key interest rate by 0.25% in its policy review following moderation in inflation.


“With both growth and inflation surprising on the downside relative to the RBI's forecast, there is a reason for the central bank to move earlier than its previous guidance,” it said.


Union Bank of India chairman and managing director D Sarkar said, “I expect that there should be some reduction in policy rates. It will boost up the sentiment and economic sentiment.


“There is expectation that the repo rate or CRR could come down by about 25 basis points,” he said.


Rajesh Iyer, head-products and research, Kotak Wealth Management said, “We continue to expect no change in the Repo rate by the RBI in the December policy, with the first cut of 25bps likely to come on the next policy date of 29th January. However, given the liquidity condition, the RBI could provide another 25 bps easing in the CRR that would infuse around Rs17,500 crore of liquidity into the banking system.”


For Home Minister Shinde, 26/11 mastermind Hafiz Saeed is 'Mr' and 'Shri'

Shinde, addressed Hafiz Saeed, the key conspirator of the Mumbai terror attacks, as 'Mr' and 'Shri' twice each during the course of a statement on the visit of Pakistan's Interior Minister Rehman Malik

New Delhi: Jamaat-ud-Dawa chief Hafiz Saeed may be the key conspirator of the Mumbai terror attacks, but Home Minister Sushilkumar Shinde referred to him in Parliament using honorifics like 'Mr' and 'Shri', reports PTI.


Shinde, during the course of a statement on the visit of Pakistan's Interior Minister Rehman Malik, addressed Saeed as 'Mr' and 'Shri' twice each.


"Mr Rehman Malik, Interior Minister of Pakistan has been telling us repeatedly that he had arrested Mr Hafiz Saeed thrice and that on each occasion, he was let off by the courts for lack of evidence," Shinde said in an identical statement in both Houses of Parliament.


"We had been given to understand by the Interior Minister of Pakistan that Mr Hafiz Saeed had been arrested on the charges of being a part of the conspiracy for the 26/11 Mumbai terror attacks. .... When we pursued this matter, they have given us papers pertaining to the detentions of Shri Hafiz Saeed in 2002 and 2009.


"From the papers given to us, it is clear that the detentions of Shri Hafiz Saeed in the aforesaid cases were for other reasons and not for his role as a conspirator in the 26/11 Mumbai terror attacks. Therefore, I can only say that Mr Rehman Malik appears to have been misinformed in the matter," the Minister said.




4 years ago

do something more than writing so as such politicians dont rule our nation

Taming Inflation

For taming inflation, long-term planning, regulatory support and c-oordinated efforts by the government, businesses and better consumer-awareness may have to get much more attention than they are getting now

Many of us are averse to buying things which have no fixed price. Especially post-LPG (liberalization, privatization and globalization, circa 1991), the opportunities for such aversion to manifest have grown manifold and made the life miserable for people belonging to a class which is contemptuously called middle class by the rich and looked upon with envy by the poor. If one has to buy things at reasonable prices, whether it is toilet soap or an air ticket, one has to be a market wizard. Like operating in the stock market, one has to select the time, day of the week, outlet and various other variables before carrying out a transaction.


The controversies about sale of 2G spectrum bandwidths and auction of mining rights revealed that whether in buying or selling, governments are also facing dilemmas similar to the one being faced by the middle class. Kapil Sibal initially gave us a bagful of relief when he argued that if Peter has been robbed, it is for paying Paul. His argument was: “Nothing to worry. The losses to the exchequer are the gains of mobile users”. There were many takers for this explanation and millions of mobile users are likely to vote for the candidate of Sibal’s choice in future elections. We may get some ‘idea’ when the results of current elections come!


These days, there is lot of discussion in the media and elsewhere about food inflation.

Last year, sambar dal (tuar dal) of almost equal quality was available in Thiruvananthapuram at Rs34 a kg at a Public Distribution System (PDS) outlet and at Rs106 a kg at a well-known departmental store. There were takers for both. If someone is able to research and explain the sources and uses of the difference of Rs 72 (Rs106 minus Rs34) it would be much easier to resolve the conflict between CPI (Consumer Price Index) related inflation and WPI (Wholesale Price Index related inflation which is a perennial worry for policymakers. No, it is not my purpose in this article to mediate between the two groups of economists fighting on this issue.


The word ‘subsidy’, because of the way in which it is being used by economists, analysts and planners, has got a bad reputation in India. When flowers are destroyed in Holland market to manage prices, or costs of cultivation are supported in US to ensure production of certain commodities, or food coupons are given at reduced rates or free of cost to certain classes of people in developed countries, there is not much hue and cry over the cost to the taxpayer or ‘subsidy’ factored in, in different forms. So long as a rational costs-prices-wages-income policy is not in place, so long as starvation wages, unemployment and under-employment remain at ugly levels, any government, even a government with former FM as president and the BPL (Businessman-Politician-Lawyer) leader as FM will not be able to go ahead with reforms just to support the upper middle class and rich people who account for less than 20% of India’s population. ‘Subsidy’ will resurface in one form or the other.


Distortion and therefore exploitation of the consumer is the highest in sectors like housing and healthcare. For obvious reasons, these two sectors get the maximum policy support or support by not having a transparent and rational policy. One need not be an economist to understand the porous marketing mechanism for sale of essential drugs, costs and margins, the vested interests in pharmaceutical industry and how they manage or frustrate even the genuine moves to control prices or improve availability of such drugs and how slow public distribution system works. Similar is the case in the real estate sector which remains in the game with no rules of the game that creates any trouble or any umpire watching.


Generally, neither the doctors nor the patients want or trust generic drugs. There have not been sufficient efforts to create awareness about the availability of ‘genuine’ generic drugs which can be substituted for branded ones. Even wholesale users of generic medicines like the CGHS outlets, by going for the low-cost (or high-margin?) products and compromising on quality, end up in enhancing the fear-psychosis ruling the patient’s mind. At least to expose the greed factor, authorities should periodically publish information about availability of quality generic drugs and the prices at which essential drugs are available at wholesale and retail outlets.


Going a step further, one is tempted to suggest that Indian Medical Association or any other authority or agency responsible should undertake an awareness programme for the benefit of both doctors and patients about the costs and prices of essential medicines and availability of low cost good quality substitute drugs in place of costly branded medicines. Sometime back it was reported in the media that the price differential in respect of Insulin can go down to Rs52 (from the present range of Rs140-230). Such revelations should be an eye-opener for the government to initiate quick remedial action which can save several lives.


For taming inflation or plainly to retain prices within acceptable  levels, long-term planning, regulatory support and coordinated efforts by government and stakeholders in the market and better consumer-awareness may have to get much more attention than they are getting now. Periodic wide fluctuations in onion prices are one indicator to show how those who gain control over stocks of goods that have a longer shelf-life manipulate prices. The government may not need an economist to tell that the position of demand and supply has an impact on prices. Procurement by processing industry and wholesalers who have ongoing responsibility to maintain supplies to retail outlets like departmental stores and supply-chains, purchase by affluent pockets/states within the country which can afford to pay higher prices and export commitments affect prices of vegetables, meat and eggs. A long-term policy on the food front may have to factor in improving productivity of land under cultivation, encouraging multiple-cropping patterns wherever feasible, ensuring remunerative farm-gate prices, estimating in advance the state-wise requirements for consumption, processing and export and regulating inter-state movements taking into account the potential for increasing local production. For such a change in approach, grass-root-level planning by sharing responsibility with state governments and local self-government bodies has to become a reality. There is a limit up to which sermons and directives from Delhi can help improve the position.


The managers of fiscal and monetary policy cannot be blamed as inflation is only one of the indicators that tell them the results of various fiscal and monetary policy measures they initiate. Depending on the direction they look, they are always able to either venture an optimistic prediction or tell us where either of them need correct the next step. This partly explains the ongoing debate among economists, bankers and political leadership about the direction monetary and fiscal policies should take. Problem is also about various categories of inflation, the methods of calculation of inflation and how the inflation (CPI or WPI inflation, for instance) affect different sectors of economy and different income-groups. There is no clarity or uniformity in perspective on such things among those who are responsible to prescribe corrective measures. The ‘Inflation elephant’ is perceived as a different monster by scholars from different schools of economics.


To read more articles by MG Warrier, please click here.


(MG Warrier is former general manager of Reserve Bank of India.)



Akhil Kodali

4 years ago

The author is not well versed with what causes inflation.
RBI and RBI alone causes inflation.

Inflation is a result in increase in credit and money supply.

If it has the will power it can cure it in less than a year.



In Reply to Akhil Kodali 4 years ago

So, Akhil had no specific steps by RBI to control inflation in mind except bringing down money supply (and credit!)! He is depending on the will power of RBI. This was just a casual comment, I suppose.


In Reply to Akhil Kodali 4 years ago

Fine. Dear Akhil, please suggest three things RBI should do, which RBI has not done yet, which will 'cure' inflation in the timeframe of less than one year.

Akhil Kodali

In Reply to M G WARRIER 3 years ago

Better late than never
Distinguish between types of credit -
consumption(govt borrowing and individual loans like housing, personal) and
investment (anything that can increase productive capacity)

1. Discourage consumption credit and boot investment credit.

2. Stop messing around using OMO to subsidize govt borrowing at the expense of investment.

3. Remove the archaic rule - money lenders cannot borrow but can lend. Let them borrow and lend this will bring down credit cost of the poor who desperately need their services or their working capital requirements

Of the 3 the 3rd one will have the greatest impact

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