The move is appropriate and adequate, says govt

Even as some sections of industry found the 75 basis points (bps) increase in the cash reserve ratio (CRR) more than expected, the government commended the Reserve Bank of India (RBI) for the “right move” and said it would not result in an immediate increase in interest rates. It said the Reserve Bank had aptly acknowledged the need for paying attention to inflation as well as growth.

“In our assessment, the Reserve Bank has taken a very balanced view of the situation. The CRR hike of 75 bps, in our view, is appropriate and adequate, because it will only impact the excess liquidity in the system,” Finance Secretary Ashok Chawla told reporters.

On the possibility of a hike in interest rates and its impact on industrial recovery, he said, “Bankers have been saying that they do not see the possibility of any rate hike at this stage… RBI has used only CRR. It has not used any other instruments of monetary policy. There is no need to over react.”

Chawla said RBI’s growth forecast of 7.5 per cent for this fiscal was in line with the government’s projection. He added food price inflation was a concern for the government and it was taking measures to contain it.

Chief Economic Advisor Kaushik Basu said RBI was rightly assessing the economic situation and the hike in CRR signaled it wanted to ensure that food inflation did not spill into other sectors.

“This is a sensible move. A slight increase in CRR will not affect growth. There is a fair amount of liquidity in the system, and this tightening will not affect advances,” Basu told Business Standard.

Asked whether sucking out Rs 36,000 crore would affect upcoming public issues, especially NTPC’s follow-on issue, he said the move was not likely to affect the market.

The government and the central bank have been working in tandem to deal with the adverse economic situation faced by the country. RBI Governor D Subbarao had met Finance Minister Pranab Mukherjee twice in the last two weeks to review the macro-economic situation ahead of the monetary policy announcement.