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Priya Nair
Radhika Menon

Mumbai, April 5 Faced with the tough job of balancing growth, which is showing signs of slowing down, and inflation, which is threatening to rise, the Reserve Bank of India is likely to use the twin tools of market stabilisation schemes (MSS) and cash reserve ratio (CRR), say bankers and analysts.

This move, while tightening the problem of excess money supply, would not slow down growth, said experts.

CRR is the proportion of deposits mobilised by banks and parked with RBI for statutory requirement. Banks do not earn any interest on the cash reserves.

Inflation, which touched a three-year high at 7 per cent, is mainly on account of supply side constraints, in terms of the rise in commodity, steel and crude oil prices. Therefore, monetary policy measures alone would not help rein in the inflation, said a banker.

While the Government has already taken some measures by restricting export of essential food commodities and fiscal measures like cutting duties on certain commodities, it is now the central bank’s turn to do its bit.

According to Mr M.B.N. Rao, Chairman and Managing Director, Canara Bank, “The Government has taken several measures and the RBI might wait to receive more inputs to take a decision. In any case, credit growth this year is lower at 20 per cent for the industry, against the projected 24-25 per cent. Money supply is higher than the projected 17 per cent, on account of capital flows. Deposit growth at 22 per cent has been higher than the projected 18-19 per cent. Hence, the RBI might use an instrument like the CRR to reduce liquidity.”

The real challenge for RBI is to control inflation without hurting growth, said Mr S.A. Bhatt, Chairman and Managing Director, Indian Overseas Bank. “It is likely that the RBI may make it more expensive to lend to real estate and stock markets, as these are speculative sectors, but may allow lending to productive sectors. If RBI increases repo rate, it is likely that the credit growth may come down even more,” he said.

Mr B. Sambamurthy, Chairman and Managing Director, Corporation Bank, said the RBI’s prescription would include both monetary tightening to tackle rising inflation, and also monetary easing to address concerns of growth slowing down. “If inflation is not contained it will have an impact on growth as well. Therefore, the RBI is likely to take some steps of tightening,” he said.

According to Mr Tarun Bhatia, Head, Financial Sector Ratings, Crisil, if one goes by the past monetary policies then the RBI may act on curbing the inflow of funds. “RBI may hike the CRR to control liquidity and reduce inflationary pressures. There are demand side pressures, as numbers indicate that the corporate sector has shown strong growth last month,” he said.

Ms Sonal Varma, India Economist, Lehman Brothers, also ruled out a hike in repo rates in the April monetary policy, as it could raise the risk of growth slowing down. “We expect the RBI to maintain status quo in interest rates in the April monetary policy. But liquidity tightening using MSS and CRR cannot be ruled out to anchor inflation expectations,” she said.

After market hours, the RBI announced auctions worth Rs 13,000 crore, over and above a scheduled auction of Rs 10,000 crore next week. Surplus cash in the system on Friday was around Rs 38,000 crore.

More Stories on : RBI & Other Central Banks | Economy | CRR & Bank Rates

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