RBI squeezes flow of money supply

As much as Rs 36,000 crore to be sucked out to tame inflation

The hike will help suck out Rs 36,000 crore from the banking system, which means banks will have less cash to lend, thus curtailing money supply and consumption and to that extent combat inflation.

But the hike will hardly make a dent on banks’liquidity position, which was Rs 48 lakh crore as of January 15.
The RBI, which last year announced its intent to withdraw the monetary stimulus, left other policy rates unchanged, while asking the government to start rolling back fiscal stimulus.

Although bankers said there would not be any immediate hike in lending rates, the hike in CRR evoked sharp criticism from India Inc, which said the withdrawal of monetary stimulus was ill-timed given the fragile economic recovery. The monetary tightening was aimed at cooling inflation, which is hovering over 7 per cent. But it is food inflation at over 17 per cent that is worrying the government.

The RBI said it expects inflation to rise further to 8.5 per cent by this fiscal-end and GDP growth to be 7.5 per cent.

Briefing reporters, RBI Governor D Subbarao said: “we have made a detailed calculation on the liquidity needs for next several weeks to meet the potential demand for credit from the private sector, before effecting the CRR hike.”   He said: “the CRR hike may not impact lending rates immediately, but it will definitely put pressure on cost of funds over a period.  And it is for banks to take a call on that.”

Subbarao said the March-end inflation forecast had been upped to 8.5 per cent from 6.5 per cent;  he expected inflation to moderate from July onwards. However, he promised to respond to inflation swiftly through policy adjustments. “The monetary policy will contain inflation perception to 4-4.5 per cent. We retain our medium-term objective of 3 per cent inflation.”

He said it was necessary to carry forward the process of (stimulus) exit further, but felt that strong anti-inflationary steps may undermine the recovery process.

Hinting at more market stabilisation schemes, Subbarao said RBI expected large capital flows due to India’s growth and also on account of high global liquidity. The sharp rise in flows may complicate exchange rate management.