JOIN USThe Reserve Bank’s decision to cut the cash reserve ratio (CRR), which indicates the amount of money banks have to keep with the central bank, was surprising both for its timing and size.
The bank’s monetary policy review is due later this week and any change in the CRR was expected only then. But by deciding to cut the CRR a few days earlier and helping to release about Rs 48,000 crore into the system, the apex bank may have acknowledged the seriousness of the liquidity problems faced by the banks. It has in the last six weeks helped the banks with about Rs 80,000 crore through CRR adjustments. It has infused further liquidity with bond purchases also. It was only a 50 basis point cut in the CRR that was being expected.
The apex bank’s activism could be interpreted in different ways. The CRR cut in January did not ease the liquidity situation substantially. There would be further crunch with the expected demand for about Rs 50,000 crore this week for advance tax payments. The bank may have been anticipating this requirement by freeing about Rs 48,000 crore now. The situation might otherwise have been dire. The RBI could also have been giving out a signal that it may be ready to effect a reduction in interest rates. This is a positive reading based on hope but the bank may be having other constraints before taking a decision on rate cuts after months of tight money policy.
It could be waiting for the February inflation figures which are due now and more importantly for the action the government might take to reduce the soaring fiscal deficit. The course of action that the government might take will be known when the union budget is introduced this week. The fear may be that a reduction in policy rates now without an initiative from the government to reduce spending would again stoke up inflationary pressures, which have been easing.
This is again the growth versus inflation dilemma that the RBI has faced for months. It was always strongly on the side of reining in inflation at the cost of growth but the distress may now have gone too widespread and deep for it to stick to its old policy. In these circumstances the CRR rate may be considered as a welcome but insufficient measure.