CRR cut to increase liquidity, boost growth: India’s Finance Minister
The Reserve Bank’s decision to cut cash reserve ratio (CRR) by half a percentage point will boost the economic growth by increasing liquidity in the system and reducing cost of fund, the Finance Ministry said today.
“CRR cut ensures that fair amount of money is available, the cost of fund is reduced … All these things are good to create a growth enhancing impression,” Economic Affairs Secretary R Gopalan told reporters here.
He said the third quarter monetary policy also indicates that the interest rate cycle has peaked and there is a recognition that growth has to be now fostered.
The CRR, the amount of deposits banks are required to keep with RBI in cash, has been reduced to 5.5 per cent from 6 per cent with effect from January 28, releasing Rs 32,000 crore in the system to ease the liquidity problems.
RBI expects the economic growth to be 7 per cent this fiscal, but Gopalan said the third quarter GDP numbers, which are yet to be released, would give an idea about the growth for whole 2011-12 fiscal.
“The (GDP) numbers should give us an idea of what the growth for whole year is going to be,” he said. The third quarter economic growth figures would be released next month.
The economic growth slowed down to 6.9 per cent in the second quarter of the fiscal from 8.4 per cent in the same period last fiscal.
On the year-end inflation, Gopalan said it is likely to be 7 per cent or even slightly lower than thatTerming the RBI’s policy action a “wise decision”, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said given the fact that headline inflation has come down, some signal has to go out. In this regard, the RBI has chosen to use the CRR measure for giving a signal.
“But reduction of the policy rate will have to depend upon the behaviour of non-food manufacturing inflation. Unless that comes down and give definite signs of a decline, the policy rate cannot be changed. I think that’s the real message from the Reserve Bank,” he said.
However, the liquidity easing measures will have an impact on interest rates, he said.
“The improvement in liquidity conditions will automatically have an effect on interest rates. Improvement in liquidity conditions will lead to softening of interest rates,” he said.
Asked if liquidity easing measures will push up inflation going forward, he said: “There is a certain amount of tightness in the liquidity and it is not that liquidity is plenty and we are adding further to the liquidity to the system. Therefore, the action of the RBI must be seen in that particular context.”
On inflation, Rangarajan said, “I believe the food inflation would continue to fall till March.”