This refers to your edit “Debating cash reserve ratio” (September 4). At a time when the Reserve Bank of India (RBI) has been fighting a persistently stubborn bout of inflation in the country, the debate on the relevance of the cash reserve ratio (CRR) is unfortunate. RBI has kept multiple tools of credit control to address multiple objectives and the CRR has been used to manage structural changes in liquidity. Although liquidity can be managed through open market operations, the inadequate size and lack of depth in the Indian bond market limit the potency of that tool. Even if the banking regulator agrees to do away with the CRR, the funds that are released to the banking system cannot supplement the liquidity position of banks. Perhaps one way to pacify banks is to reintroduce interest payable on such deposits held as CRR with the central bank.
K V Rao Bangalore
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