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RBI may squeeze cash, but leave rates alone

As the Reserve Bank of India gets set to unveil its credit policy review on Friday, indications are that the central bank will suck some cash out of the system to keep inflation under check, while leaving rates unchanged, because a rebounding economy needs that to sustain its growth momentum.

business Updated: Jan 28, 2010 20:26 IST
HT Correspondent

As the Reserve Bank of India gets set to unveil its credit policy review on Friday, indications are that the central bank will suck some cash out of the system to keep inflation under check, while leaving rates unchanged, because a rebounding economy needs that to sustain its growth momentum.

Experts believe that RBI may increase the cash reserve ratio (CRR) – the quantum of deposits that banks have to park with RBI – by 0.5 percentage points or 50 basis points. This is expected to suck out Rs 20,000 crore of the Rs 65,000 crore surplus cash injected into the system since early 2008, after which it began easing money supply.

While it is amply evident that the current rise in inflation is largely on account of a rise in food prices, analysts feel that this is likely to diffuse into “core” inflation.

The prime minister's economic advisory council has also expressed concern over the excess liquidity. C. Rangarajan, its chairman, has already said that the RBI may have to increase the CRR to address the problem.

RBI governor Duvvuri Subbarao has indicated that there has to be a gradual withdrawal of the easy monetary policy. However, industry lobbies, bankers and even the finance ministry have said that tighten money could stunt growth.

A rise in CRR, while acting as a cautionary signal, is not expected to immediately put any pressure on the banks to increase interest rates as there is sufficient liquidity in the system for banks to meet credit needs of farmers and industries.

The repurchase (repo) rate is unlikely to tinker with it as that would directly have an impact on interest rates.