'RBI's infusing liquidity more potent than rate cut'

New Delhi: Prime Minister's Economic Advisory Council (PMEAC) on Monday said the RBI move to infuse liquidity in the system is "more potent" than a cut in interest rate and it will help banks expand credit portfolio.

"The RBI has taken a cautious step. The latest data on inflation has not been encouraging...Under the circumstances, I believe this (25 bps reduction in CRR) is the maximum the Reserve Bank could have done," PMEAC Chairman C Rangarajan said.

In its mid-quarter monetary policy review, the RBI kept the key policy rate (repo rate) unchanged in view of high inflation but reduced the Cash Reserve Ratio, the portion of deposits that banks keep with the RBI. The move will infuse Rs 17,000 crore in the banking system.

In some ways, Rangarajan said, a reduction in CRR is "more potent than even an announcement regarding policy rate" as the move will provide some additional liquidity and enable banks to expand their credit portfolio.

"I said that CRR is a more potent instrument only because CRR acts on the liquidity base of the commercial banks and therefore, even if an announcement is made on the policy rates the Reserve Bank of India will have to take actions either through Open Market Operations or through other mechanisms to provide liquidity," Rangarajan said.

He said the RBI recognised certain steps taken by the government and slashed CRR though the cut is not a big reduction.

Among other decisions, Government hiked the regulated diesel prices by over Rs 5 per litre, which satisfies the RBI's long standing demand for containing fiscal deficit. It also liberalised foreign holding norms in some sectors.

Rangarajan said the RBI policy in the coming weeks will depend upon how inflation behaves.

"If inflation hardens further, leaving out the direct impact of diesel price increase, then it may be difficult for RBI to follow further easing of the policy (rate)... I don't think any central bank will be comfortable with an inflation rate of 7.5 per cent," he said.

The wholesale price-based inflation for August moved up to 7.55 per cent from 6.87 per cent in the previous month.