Financial Daily from THE HINDU group of publications
Monday, Sep 20, 2004
Financial Daily from THE HINDU group of publications Monday, Sep 20, 2004 |
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Opinion
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Letters RBI's dilemma
Will the rise in cash reserve ratio (CRR), announced by the Reserve Bank of India (RBI), solve the problem of inflation due to excess liquidity? The answer is `no', ceteris paribus. The excess, estimated to be around Rs 40,000 crore, has not so far done any damage to aggregate demand and prices because it is not part of money supply. But it has the potential to create a problem in the future. It has so far been impounded by the RBI through repo transactions. Around a fifth of the surplus is being transferred now from the repo account to CRR account. An hike in CRR will start biting with a time-lag only when the entire surplus is eliminated. At that stage the Bank Rate will also become effective. The RBI faces a dilemma. Any further hiking of the CRR at a time when credit offtake displays a rising trend will run counter to its commitment to meet genuine needs for funds. A. Seshan Mumbai
Letters to the editor and contributions can be sent by e-mail to: bleditor@thehindu.co.in
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