The Hindu Business Line : CRR hike

This has reference to the Reserve Bank of India’s decision to hike the Cash Reserve Ratio by 0.5 percentage points to 7 per cent to manage appropriate liquidity and contain inflation (Business Line, August 1).

Theoretically, the argument that hiking the CRR would reduce the deposits and loanable funds in the hands of commercial banks and consequently the demand for funds, goods, etc., and that prices would then fall, sounds nice. (Of course, in the present case, commercial banks are unlikely to hike the lending rates due to excess liquidity).

But in reality, people who are bent upon completing the tasks (say, constructing houses or pursuing higher education) no matter the quantum of money needed for such projects, are not interest-rate-conscious. They may easily get the funds from the unorganised money market and hence the purpose of the policy to maintain appropriate liquidity will be defeated.

On the contrary, the focus must shift to production-management. Production units with sound scientific management techniques (time study, fatigue study, movement study, etc.) can ensure there is no mismatch between the demand for and the supply of goods and no inflationary gap. But it is imperative that the Centre and the States encourage the entrepreneurs to enhance the supply of goods and services.

As long as the parallel economy and the unorganised money market exist, monetary tweaking, such as hiking the CRR, Bank Rate, etc., cannot reap the expected dividends.

S. Ramakrishnasayee Ranipet

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