CRR cut: Growth more important than inflation, says Montek

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Terming the decision of the Reserve Bank of India to cut cash reserve ration a step in the right direction, Planning Commission Deputy Chairman Montek Singh Ahluwalia on Tuesday said the need to push growth should take precedence over combating inflation.

“I can see that the RBI remains concerned about inflation. I think we need to watch what happens in inflation but probably the need to push the growth at this moment is little higher on agenda than the concern about inflation,” Mr. Ahluwalia told reporters in New Delhi.

Showing concerns over hardening inflation, the RBI on Tuesday left the key interest rate unchanged but reduced cash reserve ratio by 0.25 per cent to inject Rs. 17,500 crore liquidity into the financial system.

The CRR or the portion of deposits banks have to park with the RBI now stands at 4.25 per cent while the repo rate, at which RBI lends to the system, has been retained at 8 per cent.

Mr. Ahluwalia said, “It was expected that they (RBI) would move in the direction that would be supportive of revival of growth. I do think that the reduction in the CRR is a step in that direction. Hopefully it would moderate pressure on the interest rates.”

About the RBI not doing enough to push growth, he said, “We have to push for growth anyway. Monetary policy is very important aspect of the growth push, but most of what need to be done for growth, has to be done by the government and we are going to do it.”

He is of the view that CRR cut would have stronger impact on interest rate than simply adjusting the repo rate because bank does not lend freely at the repo rate and it does not play the role which FED fund rate do in the U.S.

On the fiscal consolidation road map chalked out by Union Finance Minister P. Chidambaram, he said, “We are determined to bring the fiscal deficit down.”

On whether monetary policy is in sync with fiscal policy, he said, “...enough has been done to indicate a start in other policies like fiscal consolidation, reforms and moving big projects... the direction that monetary should move is quite clearly to be supportive of that.”

About the lowering of growth projection for this fiscal to 5.8 per cent this fiscal from earlier estimates of 6.5 per cent, he said, “If we do 5.8 per cent GDP growth this fiscal that would actually imply very significant improvement over the results that we have got for the first quarter.”

“I think that the growth in the second quarter would be similar to first quarter. If we do 5.5 in the first six months, can we do better in next half. I think we can. Therefore 5.8 per cent is not broadly off the mark,” he added.