The country needs to move towards a situation where the cash reserve ratio comes down and is used only in extraordinary conditions, said C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.
“The role of CRR as an instrument of credit control will come down…,” Rangarajan told reporters on the sidelines of the FICCI-IBA Summit.
Cash reserve ratio (CRR) is the portion of deposits that banks have to park with the central bank. Currently, it is at 4.75 per cent of deposits.
SBI Chairman Pratip Chaudhuri recently stirred a debate on CRR by calling for either its complete phase out or payment of interest on it. However, RBI Deputy Governor K C Chakrabarty has nixed the idea.
Rangarajan said “You must look at the evolution of CRR in the country. Prior to 1991, CRR was the major instrument of credit control because interest rate was administered and therefore Open Market Operations could not be conducted. Hence, CRR was the only instrument of credit control available with RBI.”
In a lighter vein he said “by 1991, we had an incremental CRR and we increased the CRR so frequently that somebody asked me if CRR was supposed to stand for my initials.”
Inflation and growth
Rangarajan said inflation is expected to come down to 7 per cent by March 2013 and to more comfortable levels in the following year.
He, however, pointed out that a hike in diesel prices could lead to a temporary rise in inflation.
The EAC has projected a growth rate of 6.7 per cent for the current fiscal. The growth rate will pick up further and perhaps in another two years time the growth rate will be at 8 per cent, said Rangarajan.
Reforms
Areas such as fiscal consolidation and FDI in some sectors will be the key to reforms, felt Rangarajan.
In 2011-12, growth rate was strong in the first half but slowed in the second half. Hence, the country will have some benefit of the low base effect in the second half this year.
“Reforms in infrastructure sectors like coal, power and steel will improve during the current year. Special efforts have been made in increasing the coal production and in power, steel and cement sectors, he said.