OMOs better than CRR cuts

C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said he favoured open market operations (OMOs) to manage liquidity instead of cash reserve ratio cut.

After releasing Prime Minister’s Economic Advisory Council (PMEAC)’s Review of the Economy for 2011-12, Rangarajan, who was RBI governor in 1990s, said: “In my view, OMOs are better instruments as you can calibrate and time it according to liquidity conditions. I have favoured OMOs as appropriate instrument for injecting liquidity into the system.”

His comments come a day after the Reserve Bank of India deputy governor Subir Gokarn said the central bank will consider another CRR cut to infuse liquidity into the system. Yesterday, Gokarn said that OMOs remains an option as we go along. “To the extent an opportunity is available for further CRR cuts, we will also consider that,” he had said.

CRR stand at 5.5 per cent after a 50 basis points cut in January.

Though, headline inflation eased to 6.55 per cent in January 2012, Rangarajan said it is still not in the comfortable zone. “It is up to the RBI to take a view on cutting rates. Though headline inflation has come down, it is above the comfortable zone of the monetary authority.”

The PMEAC has projected headline inflation at around 6.5 per cent by March end, and at around 5 and 6 per cent in 2012-13.

According to Rangarajan, though inflation has showed signs of decline, non-food manufacturing inflation, often taken as an indicator of demand, is still high.

“By the time monetary authority takes policy decision, another month’s inflation data will come. And we will have to wait till that time,” he said.

Inflation in non-food manufacturing products rose from 5 per cent in September 2010 to 8 per cent in September and October 2011. However, it subsequently eased. In January, it stood at a year-low of 6.68 per cent from 7.72 per cent in December.

The PMEAC said manufacturing goods inflation will remain within tolerable limits of 5 per cent in 2012-13 if food prices remain stable.

The retail inflation based on Consumer Price Index was 7.65 per cent in January.