The Reserve Bank of India (RBI) has surprised everyone again. When most bankers were expecting an increase in interest rate in the RBI's credit policy, the central bank chose to raise the Cash Reserve Ratio (CRR) once again by 0.25 per cent and keep all other rates unchanged. This CRR hike follows a 0.50 per cent hike announced only about 10 days ago. Total CRR hike in this month thus works out to 0.75 per cent which is expected to mop up about Rs 28,000 crore from the system.By raising the CRR, the RBI has signalled that it wants to mop up excess liquidity. Theoretically, the liquidity tightening exercise should also lead to increase in interest rates, curb inflation and depreciate the value of rupee against dollar and other foreign currencies. But most bankers feel that in reality it may have little impact. The reason is that the liquidity in the system is very comfortable as borrowings have dwindled.

The main reason for the RBI maintaining the status quo was its concern about inflation. It had earlier said that inflation management is one of the top priorities. The central bank believes that wholesale inflation is “artificially suppressed” in India. As the government did not allow the prices of petroleum products to be revised in line with the increase in international prices of crude oil, the actual rate of inflation will be higher than the comfort level of 5 per cent, as and when the oil prices are revised.

Curbing liquidity may not help much in bringing down the rate of inflation because the primary reason behind price rise is the global shortage of food articles. The RBI has also recommended measures that may ease supply of food grains to market. It has asked banks to review advances to traders in agricultural commodities including, rice, wheat, oilseeds and pulses as also advances against warehouse recipients. The central bank has made it clear that barring the emergence of any adverse and unexpected developments in the economy, the overall stance of its monetary policy will continue to emphasise price stability and ensuring a monetary and interest rate environment. In view of the major economic slowdown in the US, and its resultant impact on the Indian economy, it is doubtful if the country’s GDP in the current fiscal will grow at 8.5 per cent. The central bank’s “dear money” policy is pushing up cost of production and making finance more expensive. This in turn may lead to further slowdown.