The Prime Minister’s Economic Advisory Council (PMEAC) Chairman, Dr C. Rangarajan, has defended the Reserve Bank of India’s decision to keep policy rates unchanged. This is even as India Inc felt let down by the RBI’s status-quo approach.
In the current situation, when inflation is high, cutting the policy rate would have sent a wrong signal, Dr Rangarajan told Business Line soon after RBI’s announcement.
“The RBI has struck the right balance between the need to control inflation and take measures to spur growth,” he added.
Dr Rangarajan said RBI’s announcements were on expected lines.
In its first quarter monetary policy review unveiled on Tuesday, RBI kept its key rates – lending, borrowing and cash reserve ratio (CRR) unchanged.
However, the Statutory Liquidity Ratio (SLR) — the amount of deposits that banks park in Government bonds — was reduced by one percentage point to 23 per cent.
Dr Rangarajan said the reduction in SLR along with open market operations by RBI was equivalent to a CRR cut. This would only expand the quantum of credit from the banking system to the commercial sector.
A cut in SLR will inject liquidity into the system and help offset the crowding out effect of large borrowers, he said.
On the impact of RBI’s policy rate action, Dr Rangarajan said much would depend on inflation.
He expected growth in the current fiscal to be higher than the 6.5 per cent projected by RBI. However, Dr Rangarajan agreed with RBI’s inflation forecast of seven per cent by the end of the current fiscal.
RBI has lowered the growth projection for current fiscal to 6.5 per cent from 7.3 per cent earlier. The central bank also raised the inflation forecast for end March 2013 to seven per cent from 6.5 per cent earlier.