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Central bank says will continue to use CRR tool

business Updated: Apr 21, 2010 15:12 IST

Reuters
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India's central bank will continue to use cash reserve ratio (CRR) as a monetary tool as policy transmission is less effective if only rates are used, a deputy governor said on Wednesday.

Subir Gokarn, who was speaking to reporters a day after the annual monetary policy was announced, said the central bank prefers to act in small steps, non-disruptively.

The central bank on Tuesday raised key interest rates and CRR by 25 basis points each and said further rises were likely, as it moves to return monetary policy towards pre-crisis settings and battles near double-digit inflation.

"If pricing is not going to achieve what you want, then why deny yourself the need of using quantity instruments if (the) need arises? That's really the pragmatism with which we are looking at the CRR now and I think it will continue to be the tool that we will use," Gokarn said.

Gokarn said a single instrument was not adequate as there were issues of transmission, time lag and uncertainty. The price mechanism on which rates implied was heavily dependent on the transmission mechanism, which was not as efficient as required.

Policy rate moves in India can take as long as a year to transmit to bank rate changes, while increases in the cash reserve ratio immediately sucks out liquidity from the system.

A poll by Reuters after the policy announcement on Tuesday showed that a majority of analysts expect the central bank to raise interest rates again before its next quarterly review, with rises totalling 100 basis points in both key policy rates forecast by the end of the fiscal year.

Gokarn also said that the RBI would not look to use the statutory liquidity ratio (SLR) as a monetary policy tool, calling any increase in this measure retrogressive as it is a safety pool of money and not a policy instrument.

The SLR is the proportion of deposits banks need to hold in government securities, and currently stands at 25 per cent.