The Hindu Business Line : ‘Interest rates may come under pressure’

Thiruvananthapuram, April 18 The cash reserve ratio hike will restrict the ability of banks to create credit and put upward pressure on interest rates, but it is unlikely to have any impact on the prevailing inflation, according to Dr Dharmakirti Joshi, Director and Principal Economist, Crisil.

The policy of raising interest rates is most effective when inflation is demand driven, Dr Joshi told Business Line. But the recent episode of inflation is triggered primarily by supply side factors. In such a situation, monetary tightening will only slow growth. This notwithstanding, the Reserve Bank has raised CRR by 50 basis points ahead of the policy announcement on April 29 primarily to tame inflationary expectations.

“Our inflation monitoring mechanism has been a bit lax. The signals of rising inflation should have been picked up earlier and a timely action initiated. So duty reductions on commodity imports came at a time when global prices had reached their record high levels,” Dr Joshi said.

According to Mr Abheek Barua, Chief Economist, HDFC Bank, the CRR hike is the kind of the monetary policy gesture that the Reserve Bank is required to make during times as these when inflationary expectations tend to go overboard.

Fiscal and monetary policy frameworks have to jell for the pincer attack to make any impression on the inflationary spiral, Mr Barua said. It is not right to surmise that the Reserve Bank was under pressure from any quarter to do what it chose to do on Thursday night.

“The central bank has been focused on targeting inflation, even if it may have rubbed certain interested parties the wrong way. It is ninth in the series of CRR hikes in recent times and goes to show the consistency with which the regulator has unleashed its firepower to tame inflation.”

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