The Hindu Business Line : Operation mop-up

Without the cover of the quarterly Monetary Policy review, almost unobtrusively, the Reserve Bank of India, on Friday evening, raised the Cash Reserve Ratio (CRR) from 5 per cent to 5.50 per cent to be effected in two phases by January 2007. This move had been hinted at for the past year as a step that would be required in the event of a liquidity spillover. Apparently, the RBI thinks there is far too much of money floating around than is good for the economy. The CRR hikes will impound Rs 13,500 crore, reducing by that much the money available for fuelling an unabated demand for goods and services. The effects of this move, unlike those of the hikes in the repo rates that affect the cost of borrowing by banks, will work almost immediately, or so the RBI hopes.

That inflation is casting a shadow on the runaway growth of the economy has been commented upon by policymakers. Judging simply by the official statistics on the subject, the rate of price rise is already over 5 per cent; just two years ago, it was around 3 per cent. The RBI raising the CRR comes after a gap of two years, over which period it followed a liberal interest rate regime. Like many central banks around the world, barring the US Fed, the RBI is tightening the leash a bit. But this will not help put out the inflation fires because their origins lie, as the Finance Minster has publicly admitted, in supply constraints. Partly the natural result of the high growth itself, the general price rise has to be located in the areas of non-growth, the resulting scarcity, and speculation.

Between April and October the Wholesale Price Index for primary articles moved up nearly 6 per cent; in the corresponding six months of last year it averaged 1.6 per cent. The Consumer Price Index for industrial workers averaged 6.5 per cent in the same period this year compared to 4 per cent in the six months ended October 2005; the inflation for rural labour was far worse. It is no coincidence that the price rise then emerges from the hinterland of the booming economy, namely agriculture. This also means that the ones most affected by the price rise are those outside the distributive stream of growth that is being applauded around the world.

But the story of inflation is incomplete without a measure of speculation that builds on a limited supply of real-estate targeted for specific income groups in urban centres. That pushes the prices of housing, one of the essential commodities, beyond the reach of many Indians. Inflation, therefore, is not a matter of too much, but of too little, growth.

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RBI hikes cash reserve ratio to 5.5 pc

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