Curbing Rising Inflation
Now this blog is about the current situation in India that is inflation which has been rising up the ladder week by week.
By hiking the cash reserve ratio (CRR) of banks while leaving repo and reverse repo rates unchanged, the Reserve Bank of India (RBI) has taken an easy way out of confronting inflation. While the government needs to battle inflation, which touched 7.33 per cent last week, hiking interest rates now would slow down the economy at a time when growth expectations are being downgraded across the world. The RBI has wisely refrained from doing so, sending the Sensex up by 362 points.
Hiking the CRR by 25 basis points, which comes on top of a hike of 50 basis points barely 12 days back, will leave banks with less money to lend. These measures are being seen as sucking excess liquidity from the system. If banks now hike their interest rates to make up for a shortfall in cash available for lending, the onus of raising interest rates can be passed on to them. For a government that is concerned with fighting inflation in an economy caught in election mode, while maintaining growth on an even keel, increasing CRR rates isn’t the best way out. But the markets like it, because on the face of it interest rates haven’t been raised.
By allowing the rupee to become a bit stronger against the dollar, the RBI could help bring down the prices of imported commodities as well as capital goods for industry. It could help reduce the price of fuel at a time when the import content of India’s oil needs have risen sharply, along with the price of crude. Inflationary pressure has been stoked by high food and fuel costs. Exporters’ lobbies may scream if the RBI doesn’t artificially depress the value of the rupee by buying up dollars, but the move would benefit inflation-hit consumers as well as industries that rely on imported inputs. There is something to be said for allowing the rupee to float up. The government could also cut levies on petroleum products. That would help reduce inflationary pressure.
I thought whatever our very own Mrs. Shobha bhave was teaching was worthless but now i see the relation in all the CRR and inflation thing. When we increase the CRR, banks have more money in reserve so less money to lend. This in turn will suck out the money from market and will help in curbing the inflation. Wheeew.
blog will compel me to write more and at the same time meet new intellectual people