Pranab Mukherjee laudsthe balancing measure

"A step that would help in easing the liquidity situation and spur growth without stoking inflation"

Finance Minister Pranab Mukherjee on Tuesday lauded the Reserve Bank of India's decision to cut the CRR (cash reserve ratio) by 50 basis points as a step that would help in easing the liquidity situation and spur growth without stoking inflation.

The cut in CRR from 6 per cent to 5.5 per cent with effect from January 28 will result in the release of an additional Rs.32,000 crore into the monetary system and thereby ease the liquidity situation.

Commenting on the RBI action, Mr. Mukherjee, who was in Dehradun during the day campaigning for the Congress ahead of January 30 Assembly polls in Uttarakhand, said: “[The Reserve Bank's] announcement should help address the money market liquidity, which had tightened in the past two to three months, while balancing the downside risk on growth and deceleration in moderation of inflation”.

Mr. Mukherjee pointed out that consequent to the CRR easing, banks “will have more money to lend and liquidity will increase. Because of the inflation pressure, they (the apex bank] have not altered the interest rates ... I welcome the decision of the RBI”.

On the RBI statement that a high fiscal deficit was preventing the apex bank from easing interest rates, Mr. Mukherjee noted that while the government had been taking steps, it would unveil measures to tackle the issue in the Budget for 2012-13. “... We want to reduce it by adjusting the fiscal policy, which I am doing ... and I shall [disclose] the essential features in the Budget,” he said.

Echoing similar views, Economic Affairs Secretary R. Gopalan pointed out that the cut in CRR would ease liquidity, reduce the cost of funds and thus provide a boost to growth. “CRR cut ensures that fair amount of money is available, the cost of fund is reduced ... All these things are good to create a growth enhancing impression,” Mr. Gopalan told reporters here.

Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan also dubbed the RBI measure as a “wise decision”, to catalyse growth without fuelling inflation. The cut in CRR signals that the next step — provided inflation declines further — is a cut in interest rates. “But reduction of the policy rate will have to depend upon the behaviour of non-food manufacturing inflation. Unless that comes down and give definite signs of a decline, the policy rate cannot be changed. I think that's the real message from the Reserve Bank,” he said.