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Eminent economist and Chairman of the Prime Minister’s Economic Advisory Council C. Rangarajan seems to believe the cash reserve ratio may have outlived its utility. CRR is the impounding of a prescribed percentage of banks’ deposits with the aim of controlling liquidity.
In a chat with Business Line on Friday, Rangarajan stressed that ‘open market operations’ — a mechanism by which the RBI injects or sucks out liquidity by lending to or borrowing from banks with securities as collateral — is a better instrument to manage liquidity.
The CRR assumed much importance in this country because we were not in a position to do open market operations, he said.
Such operations were ruled out at a time when interest rates were not market-determined but artificially pegged at a low level.
In those days, open market operations were not available to the RBI but today it is quite possible for the central bank to provide liquidity through appropriate OMOs,” he said.
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