Curbing liquidity should be top priority: Rangarajan

Curbing liquidity should be top priority: Rangarajan
The Hindu Business Line, December 22, 2009, Page 15

RBI likely to raise CRR, key rates soon.

Our Bureau, New Delhi

Expressing concern over the excess liquidity in the system, the Prime Minister's Economic Advisory Council Chairman, Dr C. Rangarajan, threw his weight behind the possibility of the Reserve Bank of India increasing in the Cash Reserve Ratio (CRR) to tackle the situation.

He also said there could be hike in interest rates later on to tackle inflation.

Dr Rangarajan said if the traditional seasonal decline in prices does not happen in December, then early action will be called for, adding that reduction of liquidity will be the first priority.

CRR is the liquid cash that banks have to park with the central bank as a percentage of their deposits and it currently stands at 5 per cent.

Asked about the possible action on inflation and excess liquidity, Dr Rangarajan said, “The behaviour of interest rate will depend upon a number of circumstances. But probably there could be some need to reduce liquidity at some particular point after December, if the traditional decline in prices does not happen.”

“They (RBI) could increase interest rate or reduce liquidity by acting on CRR. I think action to reduce the liquidity will be the first priority as it (reduction of liquidity) can only happen by acting on CRR. I think the overall monetary demand needs to be kept under check even though primarily it (inflation) is a supply-side problem.

“Therefore some action to reduce liquidity may be called for,” he said.

Dr Rangarajan's statements mean that the RBI could follow the CRR hike with increase in key interest rates. Repo rate or the rate at which RBI lends cash to banks, currently stands at 4.75 per cent and reverse repo rate or the rate at which RBI borrows from banks, is now at 3.25 per cent.

Monetary moves

Amidst speculation that the RBI could tighten monetary policy to curb inflation and inflationary expectations, the RBI Governor, Dr D. Subbarao, had met the Finance Minister, Mr Pranab Mukherjee, and top Finance Ministry officials on December 18.

Inflation had risen to a 10-month high of 4.78 per cent in November from 1.34 per cent in October due to a surge in the prices of primary articles coupled with a low base effect.

Food inflation had risen to 20 per cent for the year till December 5, the fastest pace in over a decade.