Lauding the RBI's decision to cut Cash Reserve Ratio (CRR), Planning Commission Deputy Chairman Montek Singh Ahluwalia on Monday said it would have a positive impact on the system and boost confidence in the economy.
"..what RBI has done is that they have acted in the market by releasing resources. It is the release of resources that will make an impact on the rest of the system. It is a step in the right direction, " Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here.
In its mid quarter review, the Reserve Bank today cut Cash Reserve Ratio by 0.25 per cent - the percentage of deposits banks keep with central bank. This will release Rs 17,000 crore of primary liquidity into the system.
Ahluwalia said that people would also read this as some sense of confidence that the totality of action taken by the government, possibly more to come, is going to bring back better macro balance into the system. ''It is all of these things that will affect the cost of credit."
About whether the RBI action would help in reviving economic growth, he was of the view that the revival of growth require many actions and monetary policy adjustments are just one component of that. However he said, "It is welcome step."
On industry's expectations on interest rate cut by the RBI which would have reduced cost of credit, he said: "When more credit becomes available that will ease pressure..the reduction in the cost of credit is going to come over a longer period when more finances flows into the system".
"I don't believe that you can lower the interest rate through some administrative action, " he added.
The repo rate, he said, "does not directly influence the cost of money unlike the Fed fund rates in the United States, where it basically undertakes to keep that interest rate at that level by injecting all the money that's needed."
"The repo rate is not a rate at which RBI guarantees to provide funds. So I think it is a complete mistake to think that the repo rate performs the same role as Fed fund does. It is a signal. I think what RBI has done is that they have acted in the market by releasing resources," he added.
On inflation he said, "Controlling inflation is very important. Although the inflation rate is lower than it was a year ago which is welcome, it is actually above the level of comfort. Over medium term, we have always said that 5 to 6 per cent rate of inflation is reasonable."
After big ticket reforms announced by the government last week like opening multi-brand retail and aviation for foreign investment, he indicated that more such decision are in store.
"There is a lot of scope for more interventions by the government. The most important priority is to revive the growth momentum in the economy. That can be done by demonstrating that in the second half of the year, people see that growth rate is higher than it was in the first half. That is the first priority," he said.
He also that the proposals like setting up an investment board for clearance of projects would essentially revive animal spirit.