The Hindu Business Line : Round one to RBI on liquidity squeeze

There was also little unanimity among economists, industrialists and bankers in the Capital on whether the RBI move would actually dampen inflation.

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New Delhi Feb. 14 The uncharacteristic silence of the Finance Minister, Mr P. Chidambaram, on the hike in cash reserve ratio (CRR) rate by the RBI and the lack of any reaction from leading chambers of commerce and industry (barring one) is being seen by economists here as a culmination to the continuing divergence of views between the central bank and the Government on the need to tighten liquidity in the economy which is seeing high growth performance in select sectors, coupled with an `abnormal' increase in asset prices in some areas.

Mr Chidambaram today determinedly avoided media persons after a card launch function here, while FICCI and Assocham refrained from issuing any statement on the issue.

There was also little unanimity among economists, industrialists and bankers in the Capital on whether the RBI move would actually dampen inflation. Stating the by now well established position that inflationary pressures in the economy were coming from primary food articles, industrial raw materials and manufactured goods, the general view was that hardening of liquidity for the productive sectors would restrain the high growth rates being notched by these sectors for the second year in a row.

Pressure points

As for the inflationary pressure points, these were being addressed through augmentation of physical supplies and imposition of fiscal measures to remove import tariff protection that was leading to a price rise in the domestic market.

Economists feel that though inflation had risen to 6.58 as per last week's reports, estimates are that the year-end inflation by March would taper off. Going by these estimations, March 31, the last day of the week for 2006-07, could see inflation down to 5.2-5.7 per cent. If March 24, 2007 is taken as the last day of the week for 2006-07, the range could be higher at 6-6.5 per cent, because that would eliminate the base effect, which saw the index go up by 0.7 per cent between March 24 and April 1 last year.

Lending rate hike

While it has been fairly public knowledge throughout 2006-07 that the RBI and the Finance Minister had been openly pushing for and against a lending rate hike, Mr Chidambaram's sympathisers say that the Finance Minister seems to have been caught low this time because of the accompanying political rhetoric on price rise in the on-going election scenario in some States. However, round two is yet to come, they say.

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